Joe Greff of JP Morgan recently handed out stock downgrades for DKNG and PENN as he adjusted his ratings for 2023.
Greff downgraded his DraftKings rating to underweight from neutral. Penn Entertainment, meanwhile, was downgraded to neutral from overweight. Greff and his team “suggest investor[s] rotate out” of the two.
The market did not take the news lightly with DKNG dropping 4.23% to $14.50 on the new earlier this week. PENN also dropped by 3.75% to $33.67 on a day that was mostly red for casino and sports betting stocks not related to Macau.
DKNG stock had rallied since Q3 report
DraftKings stock took a beating when it released its third-quarter earnings report. DKNG fell 27.8% to $11.31 at close Nov. 4 compared to the $15.67 it closed at the day before. That decline came on volume of nearly 79 million, or more than 3.5 times seen the prior day.
Investors seemed to be particularly frustrated by DKNG maintaining its expectations that profitability would come in the fourth quarter of 2023, with a potential break-even year in 2024.
DraftKings downgrade based on rally
Greff noted the stock’s rally was the reason for the downgrade while maintaining a $12 price target.
Greff forecasts DraftKings will see adjusted EBITDA losses of $475 million next year and $34 million in 2024. He expects positive adjusted EBITDA of $372 million in 2025.
The report listed three potential upsides for the stock:
- More states legalizing sports betting and iGaming than expected with quick launches
- A shorter path to profitability than expected
- In-game betting being well received by bettors, which could accelerate growth or increase market share
PENN downgrade not betting-related
Greff raised PENN’s target to $39 but downgraded to neutral as the stock is trading near fair value, with less upside potential than operators focused on Las Vegas.
One upside listed is if Barstool and theScore Bet evolve into more meaningful contributors for the business.
Greff expects EBITDAR of $70 million next year and $106 million in 2024 compared to a loss of $75 million for 2022.