Morgan Stanley analyst Thomas Allen digs into the news that the IRS is looking to adding daily fantasy sports action from operators like DraftKings (NASDAQ:DKNG) and Fanduel (OTCPK:PDYPY) under an existing excise tax for sports betting.
“This is just a memo and we expect DKNG and FLTR to fight the finding given numerous states have defined DFS as a game of skill not luck, and thus would not fall under the excise tax rule. If the rule does take effect, we estimate DFS is ~25% of DKNG’s revenue in 2020 but falling to <10% by 2025. Given half of ~40 states that the two operate in are explicitly legal for DFS, this only implies a ~$20-30m ongoing annual headwind for each operator in a worst case scenario, but there could be a larger 1x payment if enacted retroactively.”
Morgan Stanley has an Overweight rating on DraftKings and price target of $26.
Seeking Alpha authors are more cautious on DKNG in general, including Marketplace’s Howard Jay Klein, who likes the long-term story but warns on current valuation.