Despite the uproar that a surprise DraftKings surcharge announcement ignited on Wall Street to start August, financial analysts say any volatility it may have caused is likely in the rearview mirror.
The company’s stock, which dipped nearly 20% in the wake of the announcement, since rebounded as investors shift their focus to the upcoming NFL season.
DraftKings stock is currently trading around $35.46 a share, up 19% from the 9-month low of $29.83 it hit in the hours between when FanDuel rejected a similar fee and DraftKings announced it would no longer go through with it. DKNG, however, remains flat year-to-date, trailing the 18% average growth seen among North American online gaming stocks.
DraftKings declined to comment on this story.
Financial impact ‘practically nothing’
Barry Jonas of Truist Securities described the financial impact of the short-lived surcharge sag as “practically nothing.”
“While they [DraftKings] continue to grow, while they continue to be a market leader, many folks will overlook it. This traditionally is a company that beats and raises fairly consistently,” Jonas said. “While the Twitter gaming mafia may have been absorbed by this, I don’t think the average consumer or investor will remember.”
The fee on winning bettors, which had been set to start in January, aimed at mitigating high taxes from states like Illinois, which recently shifted its tax rate from 15% to a graduated 20% to 40% range. Asked whether it might drive customers away CEO Jason Robins said it would take “quite a lot” of top-line deterioration to make the surcharge “not worthwhile.”
DraftKings explained it as a way to hit financial targets without cutting into promotional or marketing efforts, as it anticipated a $50 million impact from the Illinois change just next year. However, once FanDuel opted to absorb the tax impact without a surcharge, DraftKings pulled the plug, citing customer feedback.
Wall Street the real driving force?
Jordan Bender of Citizens JMP suggested that DraftKings may have been watching its stock and listening to investors more than customers.
“It didn’t feel like they thought this one through fully and were going to let investors and analysts interpret it during the months before they launched it,” Bender said. “They threw it out there and let people opine and I don’t think its ever coming back.”
Bender was among several analysts who predicted that DraftKings may have been able to offset losing its biggest bettors if it could sustain loyalty with more casual bettors. Others were not as bullish, describing the surprise decision as “economically illiterate.”
An LSR analysis showed it could have added as much as $220 million annually to DraftKings’ bottom line, raising questions about the trade-off between revenue and customer loyalty. “Is $200M worth it for what could happen?” Bender reflected, adding that the uncertainty alone can damage a company’s stock narrative.
DraftKings positioned for growth?
Chad Beynon of Macquarie believes DraftKings is in a unique position to rise above its gaming contemporaries this NFL betting season with the surcharge in the rearview mirror.
In a recent note, Beynon pointed to a few factors that suggest a positive run for DKNG coming up, inlcuding a flat 2024 for the stock so far and recently updated second-half guidance.
Those suggest DraftKings should be “best positioned for near-term upside from favorable NFL game outcomes, higher structural hold and general [online sports betting]/iGaming growth momentum,” Beynon said.
Will DKNG stock ‘outperform’ again?
Beynon rates DraftKings at outperform with a $50 target price, noting that historically the stock has performed best in the two months leading up to the NFL season. The stock tends to fall over the season, with the price down an average of 29% from opening week after four months.
But Beynon sees the current trends as setting up DraftKings for a second-half beat, given an easier comparison period in the fourth quarter, and current third-quarter hold and growth trends.
