DraftKings, FanDuel parent slide as sports-betting tax passes Illinois Senate

Shares of DraftKings (DKNG) and FanDuel parent Flutter Entertainment (FLUT) are under pressure on Tuesday after the Illinois Senate passed a bill which included a sports-betting tax hike, making it the second-most expensive state for bet-takers to do business in. With DraftKings’ shares down almost 10% in last ten days, Oppenheimer believes some taxation concerns were likely baked in. Also commenting on the news, Deutsche told investors that it believes several states are likely to follow the lead of Illinois with higher tax rate structures when budget needs arise, including New Jersey, Michigan, Iowa, Indiana, Massachusetts, Arizona, and Kansas.

SPORTS TAX BILL: Illinois senators have approved the 2025 budget, which includes an increase in the state’s sports betting tax and the introduction of a progressive tax rate for operators based on their revenue, Tom Nightingale of SBC Americas reported. The Illinois Senate passed a budget version incorporating a progressive wagering tax increase, imposing a 40% rate on operators with the highest adjusted gross revenue. House Bill 4951 would nearly triple the tax rate for the most successful sportsbooks in the state, making Illinois’ maximum tax rate the second highest in the country, trailing only New York’s 51%.

Commenting on the Illinois Senate approval of a 2025 budget that includes a new, progressive tax on sports betting operations, BTIG says that under the new five tier schedule, it expects DraftKings and Flutter Entertainment will now pay 36% and 37% tax rates in Illinois, respectively, on gross gaming revenue next year versus 15% this year. However, the incremental direct costs should be fully offset by variable cost controls with margins unchanged, adds the firm. Beyond Illinois, BTIG does not see a great deal of momentum with tax hikes in other states at the moment.

Morgan Stanley doesn’t see the higher tax as a total surprise given the Illinois Governor suggested a 35% level as early as February this year and has been widely discussed by investors. The firm estimates the effective tax rate for Flutter would be 35%, were this to be enacted, so a $90M impact, 3% to 2024 group EBITDA, in the context of a $1.2B U.S. EBITDA improvement it expects from 2023-2025. This is ahead of mitigation measures, which Morgan Stanley thinks could be meaningful. As the scale leader in the U.S. market, the firm sees Flutter well placed to weather moderate regulatory impacts such as this, though it acknowledges this is somewhat blunted by the sliding scale structure of this particular tax proposal.

CONSOLIDATION ACCELERATION: With DraftKings’ shares down -9% in last ten days, Oppenheimer believes some taxation concerns were likely baked in. The firm is not expecting DraftKings to change 2024 IL CAC strategy and thinks more states raising taxes would negatively impact 2025-2026 buy-side EBITDA. However, Oppenheimer sees higher regulation/taxes accelerating DraftKings/FanDuel consolidation based on their ability to deploy brand spend, promo-sophistication, and product enhancements on a national scale. The firm remains a DraftKings buyer on any share-pullbacks related to unfavorable legislative outcomes, and keeps an Outperform rating on the shares with a price target of $60.

OTHER STATES TO FOLLOW: Deutsche Bank says the Illinois bill to increase taxes on the online sports betting industry, on its own, is not “overly draconian for the operators, and of little consequence to the majority of the operators in the state.” However, the industry is positioned to endure state tax pressure for years to come, the firm tells investors in a research note. Deutsche believes several states are likely to follow the lead of Illinois with higher tax rate structures, when budget needs arise, including New Jersey, Michigan, Iowa, Indiana, Massachusetts, Arizona, and Kansas. New Jersey and Michigan would be the most punitive, given the well below peer tax rates on the online sports betting side, as well as the relatively low internet casino segment tax rate, contends Deutsche Bank.

POTENTIAL BOON FOR RUSH STREET: Craig-Hallum believes that while the Illinois development is a negative for both FanDuel and DraftKings given market dominance, it could also be “a potential boon” for Rush Street Interactive (RSI) given its strong presence in both online and retail. However, the firm fears the potential for further tax increases across the U.S. if introduced. Should the proposal become law, major operators could reevaluate their level of investment in the state, Craig-Hallum adds. The firm has Buy ratings on DraftKings, Flutter, and Rush Street, and a Hold rating on Penn Entertainment (PENN).

PRICE ACTION: Shares of DraftKings have dropped over 11% to $36.25, while Flutter’s stock has slid about 5.5% to $193. Also lower are Boyd Gaming (BYD), Churchill Downs (CHDN), Genius Sports (GENI), Rush Street Interactive, and Sportradar (SRAD).