On Tuesday, BMO Capital maintained its positive stance on DraftKings Inc. (NASDAQ: NASDAQ:DKNG), reiterating an Outperform rating and a stock price target of $54.00. The firm's outlook remains unchanged despite potential challenges arising from new tax legislation being considered in Illinois that could increase the cost of operations for online sports betting companies.
The proposed tax structure in Illinois, which has passed the state Senate, suggests a progressive tax that could place the state as the third-highest in the country for online sports betting taxes, following New York and New Hampshire. The new tax rate could reach up to 51%, which would notably affect major operators like DraftKings.
Despite the potential for a 36% tax rate on DraftKings' operations under the new legislation, BMO Capital believes the long-term prospects for the online gaming industry remain strong. The shift from offline to online gaming is expected to continue, with taxes being an inherent aspect of the business landscape.
BMO Capital also noted that the presence of a significant illegal market for sports betting could mitigate the impact of tax increases in most other states. Illegal operators, who do not pay taxes, may retain more market share compared to legal operators, a factor that could influence state decisions on taxation levels.
DraftKings management has expressed that excessive taxation could drive consumers back to illegal markets, potentially causing states to lose out on additional revenue. This viewpoint suggests that many states may recognize the adverse consumer effects of high taxation and could be cautious in implementing similar tax hikes.
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