On Tuesday, Citi reaffirmed its 'Buy' rating on shares of DraftKings Inc. (NASDAQ: NASDAQ:DKNG), maintaining a $57 price target. The endorsement comes despite potential challenges arising from legislative developments in Illinois, where the Senate passed a budget proposal over the weekend that could significantly increase online sports book (OSB) tax rates. The proposed rates could climb to 40% of gross gaming revenue (GGR) for major operators, a substantial jump from the current approximate 15% tax rate.
DraftKings and its competitor FanDuel appear to be the primary OSBs that would be affected by this tax rate increase, based on their performances in 2023. Citi's analysis suggests that DraftKings could face an adverse impact on its 2024 adjusted EBITDA of up to approximately $67 million, with an annualized potential headwind of around $120 million. This is under the assumption of a worst-case scenario.
Following the announcement of the potential tax rate hike, DraftKings' stock value declined by roughly 12% on Tuesday, equating to an estimated $2.3 billion in market value loss. Citi's assessment indicates that the market may be anticipating an annualized adjusted EBITDA challenge of about $122 million for DraftKings, which aligns with the firm's projection of a worst-case scenario.
InvestingPro Insights
As Citi maintains a positive outlook on DraftKings Inc. (NASDAQ: DKNG), real-time data from InvestingPro aligns with the potential for growth in the company's financials. Analysts anticipate sales growth in the current year, with a substantial revenue increase of 57.0% over the last twelve months as of Q1 2024. Moreover, despite recent volatility, DraftKings has shown a strong 74.55% return over the past year, reflecting investor optimism and market performance. The company operates with a moderate level of debt and is expected to grow its net income this year, as indicated by the revision of earnings upwards by four analysts for the upcoming period. While the stock is trading at a high revenue valuation multiple of 23.76, the InvestingPro Fair Value estimate of $44.6 suggests that the current market price may offer an entry point for investors. For those seeking to delve deeper into DraftKings' financial health and future prospects, InvestingPro offers additional insights and tips, which can be accessed with a special offer: use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 13 additional InvestingPro Tips available for DraftKings, providing a comprehensive analysis for informed investment decisions.
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