With the NFL entering its fourth week, the NBA finals starting yesterday, and two college football divisions, the Big Ten & Pac-12, unexpectedly beginning, the sports world seems to have found a way to continue despite the pandemic. As a result, on Wednesday, Needham initiated coverage on DraftKings Inc (DKNG) with a Buy rating and $70.00 price target.
According to the analysts at Needham, there are two “underlying forces” that are responsible for their bullish outlook on DraftKings, the first of which relates to government regulation. As we continue to fight through the COVID-19 pandemic, it has become apparent that the financial situation for most states is worsening. Similarly, according to the Center on Budget and Policy Priorities, in a post-COVID-19 world, the tax revenue for 45 states as well as Washington D.C. is expected to decrease.
In order to counteract the crippling financial situations in many states, Needham analysts suggest that states should remove bans on DraftKings. At this time, less than 10 states in the country allow online sports betting through DraftKings Sportsbook, with an even smaller number of states permitting the use of DraftKings Casinos. If all states were to permit DraftKings, sports betting and online casinos would provide a new form of tax revenue.
The next driver would be the impact of technology on online sports betting/online casinos. Given that online gambling allows providers to capture a wider range of consumers’ data, technology has created a better customer experience which will likely lead to higher retention and customer lifetime value.
“Every aspect of a user's activity - bets, wins, losses, biases, preferences etc are captured, which allows providers like DKNG to offer promotions, prizes and additional contextual incentives to keep the player engaged”, stated the analysts. Unlike brick & mortar operators, online gambling providers are able to track the full consumer experience and adjust accordingly.
All in, the analysts at Needham believe that DraftKings can benefit the most from the accelerated growth of online sports betting and gambling in the U.S. As DraftKings uses its strategic approach to centering its success around product and experience, the company has long term potential to become the market leader in the sports betting industry.
Disclosure: At the time of publication, we are long DraftKings (DKNG). We wrote this article ourselves, and it expresses our own opinion. We are not receiving compensation for creating this article (other than from TheStreet) and have no business relationship with any company whose stock is mentioned in this article.