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Another day, another upgrade for shares of DraftKings Inc., although the latest one has a different tone.
While bullish DraftKings
DKNG,
upgrades earlier this week focused on the company’s profit potential, JPMorgan’s Joseph Greff moved to a neutral stance late Tuesday in light of pressure on DraftKings shares due to new competitive developments in the online-sports-betting (OSB) industry.
As Greff lifted his rating from underweight to neutral, he said he was taking advantage of a 10% after-hours selloff following rival Penn Entertainment Inc.’s
PENN,
plans to partner with Walt Disney Co.’s
DIS,
ESPN and rebrand its sportsbook as ESPN Bet.
Read more: Penn dumps Barstool for ESPN-branded sports-gambling service
The announcement was “causing a negative reaction” among DraftKings investors amid concerns of “(presumably) increased competition and promotional pressure (which we see as a reasonable interpretation) from an OSB/iGaming operator (in PENN) with very small current market share that will likely (almost have to) be aggressive, at least for the initial part of its 10-year agreement with ESPN, to incrementally promote, market, and spend more to acquire/retain its users,” Greff wrote.
He is “using this price weakness” to abandon his bearish stance, he said.
“At current levels, we see the shares’ valuation as more in balance and believe a
neutral rating is more appropriate than an underweight one,” he wrote. “Still, the valuation is expensive,” at 18.2 times 2025 estimates for enterprise value to earnings before interest, taxes, depreciation and amortization (Ebitda), making it “tough for us to find a reason to see more for upside from current levels.”
Meanwhile, Wells Fargo’s Daniel Politzer, one of the analysts who turned bullish on DraftKings shares earlier in the week, saw the potential for the company to recognize an Ebitda boost in the second half of 2023 as it presumably winds down prior semi-exclusive marketing deals with ESPN.
This could be “potentially offset by higher promos to combat what we’d assume will be a blitz from ESPN Bet,” however.
Piper Sandler’s Matt Farrell stayed bullish as well.
“We suspect ‘long-time’ users are somewhat entrenched with DraftKings at this point in time given their strong experience with the product,” he wrote, while maintaining an overweight rating. “Overall, we continue to view DraftKings as an industry leader, with scale and product advantages relative to other players.”
Shares of DraftKings were off about 9% in Wednesday morning trading.
