DraftKings Reports Q2 Miss, Analysts Wonder If Surcharges On Winnings Are A 'Gamble'

Shares of DraftKings Inc (NASDAQ:DKNG) tanked in early trading on Friday, after the company reported its second-quarter results.

The results came amid an exciting earnings season. Here are some key analyst takeaways.

• Benchmark analyst Mike Hickey reaffirmed a Buy rating, while cutting the price target to $41.
• Truist Securities analyst Barry Jonas maintained a Buy rating and price target of $53.
• JMP Securities analyst Jordan Bender reiterated a Market Outperform rating and price target of $52.
• Goldman Sachs analyst Ben Miller reaffirmed a Buy rating and price target of $60.

Check out other analyst stock ratings.

Benchmark: "The company missed its Q2 estimates, though the quarter’s weakness due to customer-friendly outcomes and higher promotion costs was anticipated by the Street," Hickey said in a note. DraftKings reported revenues of $1.104 billion, up 26% year-on-year, "driven by customer engagement, new acquisitions, and Jackpocket integration," he added.

The company raised its revenue guidance midpoint from $4.9 billion to $5.15 billion, reflecting 41% year-on-year growth, the analyst stated. "The proposed tax surcharge could be a compelling strategic fix, but there is concern that if competitors do not implement similar measures, the company may lose market share to other platforms as players might not appreciate the expense," he further wrote.

Truist Securities: DraftKings' EBITDA of $128 million came in 2% below "our recently lowered estimate," Jonas said. Consolidated EBITDA margins of around 11.5% were 40 basis points below the Street, he added.

Management reduced their full-year EBITDA guidance "fairly meaningfully" due to several factors, the analyst stated. The focus now is likely to be on "a new planned surcharge on winnings in high tax jurisdictions – a gamble in itself," he further wrote.

JMP Securities: The company's gross margins contracted by 174 basis points year-on-year, "resulting in a well-telegraphed EBITDA miss for the quarter," Bender said. Although EBITDA misses estimates, "the investment during the quarter resulted in the highest growth rate for MUPs (+48%) in several years," he added.

"The implementation of a surcharge is creative and demonstrates how far the company is willing to go to protect profitability," the analyst wrote. He explained that sports betting is a low-margin business and any increase in tax rates hurt profitability.

Goldman Sachs: Although DraftKings raised its full-year revenue guidance, its adjusted EBITDA guide was reduced, "primarily from the continuation of near-term profitability headwinds from those strong customer acquisition dynamics, inclusion of Jackpocket, launching OSB in Washington D.C. & the Illinois tax rate increase & unfavorable sport outcomes," Miller said.

The company announced a $1 billion share repurchase program, he added. The earnings call could focus on management's plans "to mitigate higher state taxes through the implementation of a gaming tax surcharge in certain high tax states beginning in 1Q25," the analyst wrote.

DKNG Price Action: Shares of DraftKings had declined by 7.97% to $32.66 at the time of publication on Friday.

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