Morgan Stanley Still Values DraftKings Despite Potential Q1 Loss

Morgan Stanley gives DraftKings ($DKNG) a favorable rating ahead of the company’s first-quarter earnings call.

In a report to clients, equity strategist Michelle Weaver cited the increase in spending per capita and more legalization as reasons Morgan Stanley expects the sports betting & iGaming industry to reach $21 billion by 2025.

Additionally, out of the 45 companies on Morgan Stanley’s high conviction list, DraftKings is the only gaming company.

As of writing, shares of $DKNG were trading at $15.24.

What to expect from the DraftKings Q1 call

DraftKings will report first-quarter earnings before US markets open on Friday, May 6. Even though Morgan Stanley still sees value in the Boston-based company, analysts expect a loss of $1.24 per share. At its peak, $DKNG was trading around $70 per share. Since then, the stock has been on a downward trend.

Many expect investors to focus on two things during Friday’s call. The first is the company’s 2022 forecast. Earlier this year, DraftKings estimated sales of $1.85 billion to $2 billion on EBITDA and an amortization loss of
$825 million to $925 million.

Secondly, investors would most likely be interested in the timeline for the acquisition of Golden Nugget Online Gaming ($GNOG).

DraftKings + Golden Nugget

Appearing on CNBC last week, GNOG chairman Tilman Fertitta suggested the online casino deal was still on track even though he did not commit to a specific timeline.

It has been nine months since DraftKings announced it was acquiring $GNOG in an all-stock deal valued at $1.5 billion. Per the agreement terms, GNOG shareholders were to receive 0.365 shares of $DKNG stock for each share of GNOG. At the time, DraftKings was trading at $52 a share, which created the $1.5 billion price tag. The deal is now valued at around $365 million, factoring in DraftKings’ current price.

Staying the course

The price drop has not halted Fertitta’s efforts to go through with the deal. Fertitta said it’s not only DraftKings that is seeing a decline in price but also other online gaming companies.

“Look at every other online gaming company, it’s universal. GNOG would likely be trading like that also,” Fertitta said.

Fertitta continued:

“I look at [DraftKings] as a long-term hold. I will be one of the largest shareholders of DraftKings. It is a tech company. You have to remember that. It is technology. You’re going to look up in a few years and it will be like Amazon or Tesla or one of these other tech stocks, and it will be $50 or $100. When they turn the corner like all tech companies and become profitable, they become really profitable. I saw that for myself running GNOG.”

Under the terms of the deal, if it’s not completed by May 31, either party can choose to terminate the merger agreement.

Last year, DraftKings CEO Jason Robins said the deal would give DraftKings access to GNOG’s database, which is nearly a 50/50 male to female ratio.