DraftKings Surcharge Gambit Was ‘Head Fake,’ Says Analyst

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Shares of DraftKings (NASDAQ: DKNG) closed higher by almost 2% Wednesday on volume that was more than double the daily average after the company reversed course on a previously announced plan to tax winning sports bets in four high-tax states.

In a note to clients, Jefferies analyst David Katz called the operator’s August 1 surcharge announcement a “head fake.” When it delivered second-quarter results on August 1, DraftKings said it planned to roll out a surcharge on winning sports wagers in Illinois, New York, Pennsylvania, and Vermont to offset exposure to those states’ high tax rates.

That move was widely panned in both the investment and sports wagering communities, and it was dropped Tuesday when FanDuel parent Flutter Entertainment (NYSE: FLUT) said it wouldn’t play along.

Our view had evolved to consider the notion that the initiative was intended to spark debate and awareness rather than actually recoup margins,” observed Katz.

Katz reiterated a “buy” rating on DraftKings with a $54 price target, which implies upside of more than 68% from Wednesday’s closing price.

Analysts Defend DraftKings Following Surcharge Misstep

In a late Tuesday announcement highlighting its decision to scrap the surcharge plan, DraftKings said the move was the result of listening to its customers.

That may be the case, but the news arrived just hours after Flutter said it wouldn’t follow suit and as DraftKings shares traded lower following the August 1 announcement. No other sportsbook operator announced similar plans, though some investors hoped Flutter would as a means of potentially validating DraftKings’ call. That didn’t play out and had DraftKings not reversed, it’s possible pensive investors would have become all the more skittish.

In his report, Katz acknowledged that some shareholders may have viewed the DraftKings surcharge plan as premature, particularly in Illinois and New York, which could consider iGaming legislation. It’s believed that in those states, online casinos could be the compromise between lawmakers and gaming companies contending with high sports betting taxes.

Truist Securities analyst Barry Jonas said DraftKings dropping the surcharge could remove some uncertainty that’s recently plagued the stock. He reiterated a “buy” rating and a $50 price target.

“The reversal should remove some uncertainty around execution risks, but also raises the question of how DKNG can offset the impact and/or if guidance needs to be tweaked,” wrote Jonas.

Mixed Views on DraftKings Among Institutional Investors

With 13F reporting season here, market participants are getting a sense of how professional investors view DraftKings. Despite several recent public relations missteps and the fact that the stock is down year to date, the institutional investor situation with DraftKings is decent.

Recent 13F’s indicate money manager Coatue sold all of its 2.3 million DraftKings shares in the second quarter and several other investment firms significantly trimmed stakes in the gaming company during the April through June period.

However, Soros Fund Management, LLC, the family office founded by billionaire financier George Soros, added a modest DraftKings stake in the second quarter and overall institutional ownership of the stock remains at the highest levels since the operator’s 2020 debut as a standalone public company.

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