As state budgets swell with excessive spending, lawmakers facing deficits are exploring avenues to boost revenues without burdening taxpayers directly. Sports gambling is therefore a natural target for legislators desperately seeking funds.
Though not yet the law of the land, the State of Illinois is planning to raise taxes on sports betting operators from a flat rate of 15% to a progressive tax structure that would effectively tax revenues in the mid-30% range. Taxes would be based on Adjusted Gross Revenue rather than profits, implying that even companies operating at a loss would still be liable for taxation.
The announcement caused shares of sports betting company DraftKings (NASDAQ:DKNG) to plummet by 10%. DraftKings, which paid roughly $10 million to the State of Illinois last year, now faces the prospect of a significant increase in its tax burden, causing investors to worry.
Moreover, there are concerns that the action in Illinois could be a harbinger of things to come, as 24 other states where online betting is allowed might follow their lead in hopes of increasing state coffers without upsetting constituents.
Despite the market’s reaction, J.P. Morgan analyst Joseph Greff does not believe it is time to panic.
“While we acknowledge investors’ concerns, we would be buyers of shares on the weakness as we believe there is (still) meaningful upside to Consensus estimates resulting from DKNG’s continued execution in an appealing sector, with attractive growth prospects and an its [sic] ability to leverage its scale to realize promotional efficiency and operating expense rationalization,” writes Greff.
The analyst further suggests that the prospective legislation’s overall effects would not be overly dramatic.
“Should the new structure be implemented, it is projected to result in a negative impact of $35 million to $44 million on 2024 gross profit, constituting approximately 2% of our in-print estimate. Additionally, it is anticipated to have a $101 million to $134 million impact on 2025 gross profit, accounting for 4% to 5% of our pre-print estimate,” writes the analyst.
Further supporting his bullish view, Greff believes that DKNG will succeed in “actively managing its promotional reinvestment rate and customer acquisition strategy to offset reduced unit economics as a result of the higher tax rate.”
Greff therefore maintains his Overweight (i.e. Buy) rating on DKNG shears, along with a $56 price target. At current levels, this would represent a ~54% gain in value. (To watch Greff’s track record, click here)
Overall, DKNG has most of Wall Street’s analyst corps on its side. Out of 26 recent reviews, only 1 recommends to Hold, while all the rest say Buy, naturally culminating in a Strong Buy consensus rating. (See DKNG stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
