DraftKings Upgraded by Morgan Stanley, Bank Sees 12 States Legalizing Sports Betting in 2021

Posted on: January 20, 2021, 10:19h.

Last updated on: January 20, 2021, 11:52h.

DraftKings (NASDAQ:DKNG) stock got a jolt today, with Morgan Stanley analyst Thomas Allen upgrading the sportsbook operator based on a potential spate of state-level legalization this year.

DraftKings stock
DraftKings stock
A DraftKings sportsbook in New Hampshire. The stock rallied today after Morgan Stanley upgraded it. (Image: Barron’s)

The widely followed gaming analyst lifted his grade on DraftKings to “overweight” from “equal weight.” He boosted his price target on the name to $60 from $39. Likely fueling some of the roughly three percent gains by the stock are Allen’s comments on the total addressable market (TAM), a vital, heavily scrutinized metric as it pertains to the next generation of gaming companies.

Recent sports betting and iGaming trends have impressed, leading us to raise our 2025 combined TAM [total addressable market] 27 percent to $15 billion,” said the analyst.

That forecast is still on the lower end of previously released estimates. For example, one well-known fund manager sees fantasy sports, esports, and sports betting combining for $37 billion in 2025, with the US sports wagering handle swelling to $180 billion.

Compelling Roadmap

As is so often the case with commentary on sports betting equities, Allen highlights the need for states to consider new revenue sources following the coronavirus pandemic. That need for cash is seen as a springboard for broader legalization of sports wagering.

The Morgan Stanley analysts see the following 12 states signing off on sports betting this year: Arizona, Connecticut, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Missouri, Ohio, Oklahoma, South Dakota, and Texas.

Regarding, Louisiana, Maryland, and South Dakota, voters in those states already approved sports wagering last November. From here, it’s a matter of when it goes lives. Maryland has the most optimistic time line, with a possibility of live sports betting arriving this summer.

The consensus is that the first legal sports bets in Lousiana will be placed in early 2022, as policymakers there use the 2021 legislative session to debate sports wagering tax issues.

Arizona and Texas could provide significant catalysts for DraftKings stock, because those fast-growing states have previously been reluctant to embrace sports betting. However, the idea is gaining momentum in the Lone Star State.

Pathway to Profitability

Adding fuel to the DraftKings fire today are comments from Allen regarding revenue and profitability. The analyst estimates the operator’s fourth-quarter revenue will come in 10 percent above consensus forecasts, and that 2022 through 2025 turnover will be 25 percent higher than Street estimates. The company is projected to post December quarter revenue of $231.8 million.

“We also expect DraftKings to start to talk about profitability in New Jersey, as FanDuel did, countering the beat thesis that the industry will never be profitable,” said Allen.

That’s important, not only because the Garden State is the largest sports betting market in the country, but also because, if true, it shows DraftKings can acquire and retain customers without losing money, even if it’s in just one market for the time being.

The overall expectation is that the company will turn profitable in 2023, though some analysts say it’s possible next year.

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