Morgan Stanley Downgrades DraftKings On Competitive Headwinds

Morgan Stanley analyst Thomas Allen has downgraded DraftKings to Hold from Buy, citing increased competition and slowing momentum on legalization in several states. He also sees various risks to the upcoming NFL (National Football League) season that could be canceled due to COVID-19 related concerns. Shares of the online sports betting player plunged over 7% on Friday after the downgrade.

The analyst downgraded DraftKings (DKNG) amid near-term risks. He wrote in a client note that the sports betting industry has become more competitive, “with numerous peers raising capital and operators looking to take first-mover advantage, so near-term losses could be much higher than expected.” He added that “While we think a lot of the increased value is valid, we are concerned investors’ expectations are too high.”

However, Allen lifted the price target to $37 (1.9% upside potential) from $26. Along with DraftKings, Allen also downgraded rival Penn National Gaming (PENN) to Hold and lifted the price target to $55 (2.4% upside potential) from $49. He believes that DraftKings and Penn National are “arguably the purest plays” on the themes of legal U.S. sports betting and online gambling.

On Aug. 14, DraftKings reported widened 2Q loss of $0.55 per share, compared with a loss of $0.15 per share in the prior-year quarter. Analysts had expected a loss of $0.20 per share. The company’s worse-than-expected loss came as various sports events were cancelled due to the COVID-19 risk. However, 2Q revenues rose to $70.9 million from $57.4 million in the year-ago quarter. Analysts had expected revenues of $66.4 million. (See DKNG stock analysis on TipRanks).

Currently, the Street has a bullish outlook on the stock. The Strong Buy analyst consensus is based on 10 Buys and 2 Holds. Meanwhile the average price target of $48.6 implies upside potential of 33.8% to current levels, with shares already surging 239% year-to-date.