On Tuesday, JPMorgan maintained its Overweight rating and $56.00 stock price target for DraftKings Inc. (NASDAQ:DKNG), despite the stock's approximately 11% decline following the Illinois Senate's passage of a bill proposing a new progressive tax structure for sports betting revenue. The bill, which adjusts the gross gaming revenue by excluding certain items, still requires re-approval by the House and the Governor's signature to become law.
DraftKings' shares dropped after the announcement of the Illinois legislation over the holiday weekend, which could lead to increased taxes in other states such as New Jersey. JPMorgan acknowledged investor concerns but recommended buying shares during the dip. The bank believes that DraftKings has significant potential to exceed market estimates due to its strong position in a growing sector and its ability to achieve operational efficiencies.
The proposed tax structure in Illinois would raise the effective tax rate for larger operators to the mid-30% range from a flat 15%, starting July 1st. The tiered tax rates would start at 20% for the first $30 million of adjusted gross revenue (AGR), increasing incrementally to 40% for AGR above $200 million.
JPMorgan estimates that the new tax regime could negatively impact DraftKings' gross profit by $35 million to $44 million in 2024, and $101 million to $134 million in 2025, which represents 2% and 4-5% of their respective year's estimates.
The firm anticipates that DraftKings will adjust its promotional and customer acquisition strategies to mitigate the effects of the higher tax rate. While these adjustments may slightly reduce the potential for organic financial outperformance through the end of 2024, JPMorgan suggests that the impact on 2025 EBITDA forecasts should be modest, especially as they expect the buy-side estimates to be significantly above the consensus of $1.026 billion.
InvestingPro Insights
In light of the recent legislative developments and market reactions, DraftKings Inc. (NASDAQ:DKNG) has been under the spotlight. According to the latest InvestingPro data, DraftKings has a market capitalization of $17.18 billion and has experienced significant revenue growth in the last twelve months as of Q1 2024, with an increase of 57%.
Despite operating at a loss with an adjusted P/E ratio of -36.92, the company's gross profit margin stands at a healthy 39.06%. Investors should note the high volatility in the stock's price, with a 1-year total return of 74.55%, reflecting both the risks and opportunities associated with the company.
Two InvestingPro Tips that may be particularly relevant for investors considering DraftKings are: Firstly, analysts expect net income to grow this year, suggesting potential for improved financial performance. Secondly, there is anticipation for sales growth in the current year, which could signal continued expansion in the market. These insights, coupled with the company's strong revenue growth, may offer a counterbalance to the concerns raised by the Illinois legislation.
For those looking to delve deeper into the financial metrics and strategic outlook for DraftKings, InvestingPro provides additional analysis and tips. There are 9 more tips available, which investors can access by visiting the InvestingPro platform. To enhance your investment research, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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