After NY's first numbers

Morgan Stanley upgrades DraftKings stock; rates US sports betting, iGaming market as very large and concentrated

2022-01-27
United States
Reading time 2:20 min

Morgan Stanley on Wednesday upgraded DraftKings stock rating and said that after its earlier stock decline, now it is a good time for a long-term investment in what it considers a "market share winner" in a potential $21 billion US sports betting market.

The stock is now rated overweight, up from equal weight, with Morgan Stanley noting the shares had dropped about 75% from its 52-week high. Shares of the online sportsbook operator, which has recently entered the giant New York mobile sports betting market, soared 17% to an intraday high of $22.69, as reported by Business Insider.

"While we and the market have been focused on near to medium-term profit concerns, we believe at the current price, one should not ignore that DKNG is a leading market share player in what will be a very large profitable market," said equity analyst Thomas Allen in a note published Wednesday. The firm's new price target of $31 a share implies a potential 60% jump from Tuesday's closing price of $19.32.

Morgan Stanley's new report follows the first official numbers released Friday by the New York State Gaming Commission for the new online sports betting market, with a $603 million handle and $48.2 million in gross gaming revenues during the first nine days. "NY results released Friday remind us how big and how concentrated an
opportunity US sports betting / iGaming is," MS said. "The implied market
revenue runrate is $1.9B, well above our prior $600M 2022 forecast and $1B
2025 forecast. Arizona was the last large state to launch and similarly, annualized
revenue is tracking at ~$400M vs. our pre-market launch 2022 forecast of
$219M. While only 4 operators were live in the first 8 days of the NY market, it
still showed how the leading players dominate, with DraftKings, FanDuel, and
Caesars at 98% / 99% of handle / GGR, with sub-scale RSI at just 2% / 1%. In Arizona, the top 5 operators have had ~95% market share to-date, in a 9 operator market."

MS also notes the high barriers to entering each state, given that the top 5 operators have at least 82% combined market share. "Even in Michigan, where there are 14 OSB operators, the top 5 have 90% share. Though there is a lot negative written about the levels of marketing and promotional spending, this has driven a very concentrated market that only players of scale can really compete in," Allen's report says.

In spite of this, Morgan Stanley points out that gambling in general is a profitable business: "For online, there are numerous public companies globally that have margins ranging from 15-40%, despite similarly operating in competitive markets. While the US won't have iGaming in a lot of states, Australian companies that just have sports betting."

Furthermore, Morgan Stanley forecasts legal US sports betting and iGaming to increase to $20.6 billion in 2025 from less than $1.5 billion in 2019 as more states legalize such activities and spending per capita rises. It cites Louisiana, Ohio, Maryland, and Nebraska as the states poised to launch online sports betting this year, "which based off recent new market outperformance, could drive additional upside."

Morgan Stanley also has a bull-case price target for DraftKings stock of $87 that is supported in part by increasingly wider confidence among experts that California could legalize online sports betting this year. The bank's bear case price target of $5 stems from a scenario under which the total addressable market would amount to $10.4 billion, with DraftKings losing market share.

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