Level / counterpoint: the case for DraftKings

© Reuters.

By Yasin Ebrahim and Christiana Sciaudone – Due to the economic fallout from the pandemic, some companies have fought for their lives and worried that their business models will still be relevant in the "new normal" when the virus is finally brought under control.

Online sports and betting providers like DraftKings are not one of these companies.

The lifting of gambling restrictions in many states in the United States offers great opportunities for online sports betting. But not only investors are ready to profit. Government regulators, hit by lost revenue from Covid shutdowns, view online gambling as a source of tax revenue. There are also risks like increased competition.'s Yasin Ebrahim argues for BullKings Inc (NASDAQ 🙂 while Christiana Sciaudone argues investors should beware of the risks. This is .

The cop case

While the bears could point to the company's lack of trading history through a reverse merger due to April's reverse merger, DraftKings is a company with solid fundamentals after the shackles of regulation were lifted two years ago.

In 2018, the U.S. Supreme Court passed a 1992 federal commercial sports betting law in most states, paving the way for 18 states, which represent just over 30% of the US population, to introduce regulated sports betting markets.

With a view to a new source of tax revenue, states like Tennessee, Virginia and New Hampshire, traditionally non-gambling states, have also legalized mobile sports betting in the first two years since the court ruling. More should fit, creating fertile ground for sports betting and online gaming providers to thrive on.

"If legislation makes a serious return, we firmly believe that the number of states willing to accelerate mobile sports betting and online gaming legislation to boost tax revenue will increase significantly," said Matt King, CEO from FanDuel, opposite ESPN.

Morgan Stanley (NYSE 🙂 estimated that the US sports betting industry will be doing $ 7 billion to $ 8 billion in business within five years.

With this in mind, sports betting and gaming providers like DraftKings can offer what others in Covid-19-ravaged industries cannot: visibility.

With the return of live sports, DraftKings recently resumed its forecast for the year, "indicating its favorable position in leveraging the pent-up demand for online sports betting," said Oppenheimer.

While the bears will be quick to point out that a second wave of Covid could put live sports back on the bank and stall dynamics in the sports betting industry. DraftKings was already proving its worth when the first wave of the pandemic broke out and stocks were twice as high

IPO price of $ 20.

"Despite the limited calendar of events, sales in June were + 20% and accelerated in late July / early August due to the return of professional sport," added Oppenheimer. "We see setbacks in sports disruption as a buying opportunity and with minimal impact on the underlying fundamentals."

The bear suitcase

Investors aren't the only ones keeping an eye on online sports betting companies like DraftKings. Governments are also starving for new tax revenues.

Take New York on the one hand. Lawmakers are likely concerned about the prospect of participating in NY Sports Day's planned $ 108 million per year taxes for the state. A New York Senate bill would allow the state's seven retail casinos to start online with a 12% sales tax and royalty, according to Casino Beats.

And that's just one of the risks to online sports betting, says Barry Jonas, director and senior equity analyst at Truist Securities. He points to Europe, where there have been setbacks from a social point of view and apparently children are betting online. There is also growing competition and loyalty issues, with bettors easily jumping from one app to another.

Gaming analysts are more conservative about online sports betting companies, Jonas said. You see increasing competition and regulatory risks, including states in fiscal trouble that could easily try to generate corporate profits as taxes rise.

Jonas initiated DraftKings at the beginning of September with a hold equivalent rating. While he likes the company and the management team, Jonas believes the market doesn't calculate risk and this has helped fuel a valuation that is just spiraling out of control. Look no further than this company's stocks, which have more than doubled since starting trading in April after completing a reverse merger with special purpose vehicle Acquisition.

Jonas points out that DraftKings' 10-year EBITDA target multiple of 11 is at the high end of Gaming's 10-year multiple. DraftKings reported revenues of $ 75 million for the second quarter and revenues of $ 130 million for the third quarter. This is based on data compiled by

"DraftKings has effectively said that they will be out of money soon," Jonas said in a telephone interview. They estimate Ebitda to be $ 1.2 billion in 2030. "I don't see DraftKings achieving their goal."

It's hard to argue that DraftKings doesn't matter. It's one of the 100 most popular stocks among Robinhood investors, which Jonas sees as one of the reasons for the current euphoria. They also recently added basketball star Michael Jordan to the board as a special advisor and signed a contract with ESPN.

But the competition is already there.

Penn National Gaming Inc. (NASDAQ 🙂 released its Pennsylvania online sportsbook this week. Penn bought a 36% stake in Barstool Sports, a digital sports media company that already has more than 56 million followers on social media – and likely some bettors among them – in January. Penn already owns gaming and racing properties and 8,800 hotel rooms. Their more traditional casino approach could ultimately prove to be a more enticing bet for consumers interested in both personal and virtual betting.

In addition, there is the BetMGM sports betting app from MGM Resorts (NYSE :). In a major vote of confidence last month, IAC announced it had acquired a 12% stake in MGM valued at around $ 1 billion, specifically pointing out online gaming revenue as a massive and still young opportunity.

While DraftKings is in vogue, Penn, Barstool and MGM are both household names. And they all compete against each other.

Finally there is the elephant in the room: Covid-19. Several major sports leagues paused over the last quarter because of the virus, and while most have restarted, the chances of a health crisis stopping the game are always around the corner.

"There are significant risks here and the price is perfect," said Jonas.

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