DraftKings (NASDAQ: DKNG) shares have declined by 15% in the last month, significantly surpassing the threshold for a correction and reducing the stock’s year-to-date increase to a modest 0.77%. Nonetheless, certain analysts continue to back the gaming stock.
On Tuesday, DraftKings joined two other stocks added to Bank of America's highly regarded US 1 List, which features the bank's top equity picks among buy-rated companies listed on domestic exchanges.
"To be included in the list, stocks must be listed in the US and must have an average daily trading volume of at least $5 million in the six months preceding their selection for the list. The list will generally consist of between 30 and 40 stocks, but not less than 25 stocks. The list is rebalanced each time a stock is added or removed. The US 1 List has outperformed the S&P 500 Index over the last year, per independent tracking,” according to Seeking Alpha.
Making its debut on the Bank of America US 1 List alongside DraftKings is the soaring semiconductor powerhouse Nvidia (NASDAQ: NVDA). These two stocks become part of an elite group that already features Amazon (NASDAQ: AMZN) and Costco (NASDAQ: COST), among others.
A significant portion of the recent decline in DraftKings stock is due to Illinois, a major sports betting state by volume, endorsing a tiered tax on gaming firms that levies higher rates on the largest operators in the region.
DraftKings and competitor FanDuel will endure the most significant impact from those increases, with their average tax rate in Illinois rising from the current 15% to 36.5% on July 1. That increase in taxes might noticeably impact the earnings of those operators in the state, and analysts are split on whether Illinois could motivate other states to take similar action.
Shortly after the Illinois sports betting tax hike was sanctioned by the State Senate, Massachusetts attempted but did not succeed in raising taxes on sportsbook operators. Certain analysts think it’s just a matter of time until additional states begin to increase taxes on online sportsbooks as well.
New Jersey, known for its favorable iGaming and sports betting tax policy, along with Michigan, has been identified as possible candidates for increasing associated taxes. These are two of the largest regulated sports wagering markets in the US, as well as two of the six states that allow online casinos.
DraftKings and its competitors have several options to counteract tax hikes, such as cutting back on marketing and promotional expenditures in the states that are implementing those increases.
"Our impression is that there are ways to mitigate tax impacts, such as adjusting promotional strategies and marketing levels, revisiting market-access strategies,” wrote Jefferies analyst David Katz in a Monday note to clients.
Katz mentioned that he is still optimistic about DraftKings and raised his price target for the stock from $52 to $54. He mentioned that increased sports betting taxes might motivate DraftKings to seek additional state approvals for its recently acquired online lottery service, Jackpocket.
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