Morgan Stanley goes 'all in on best-in-breed sports betting' stock

Published Thu, Apr 30 20208:40 AM EDT

(This story is for CNBC Pro subscribers only.) Morgan Stanley is bullish on sports betting company DraftKings, a pure play on legal gambling with strong financial growth metrics. The Wall Street firm has an overweight rating and $23 per share price target on DraftKings as it goes "all in on best-in-breed sports betting." This implies a near 20% rally from the digital sports entertainment and gaming company from Wednesday's closing price of $19.40 per share. "DraftKings is an almost pure play on the early stage legal US sports betting and iGaming growth opportunity, with a customer acquisition advantage," Morgan Stanley equity analyst Thomas Allen told clients on Wednesday. DraftKings went public in a three-way partnership with a special purpose acquisition company called Diamond Eagle Acquisition and SBtech on April 24, and rose about 14% on its market debut. Despite headwinds from the coronavirus pandemic and a halt to sports games being played, the DraftKings CEO told CNBC "e-sports has been absolutely exploding." While the sports betting industry generated about $1.5 billion in revenue in 2019, with new states legalizing and a greater shift from the illegal to legal markets, Morgan Stanley expects revenue to grow 8x to $12 billion by 2025. Alongside the industry, Morgan Stanley expects DraftKings to grow its revenue more than 30% in the same time. The firm's bull case sees DraftKings doubling its revenue by 2025. "We think DraftKings will reach 20% market share of US sports betting and 15% of online gambling," said Allen. Not only does DraftKings have first-mover advantage, but it has more than $500 million in cash on hand, while some competitors are in difficult liquidity positions. The Wall Street firm also sees DraftKings turning a profit as soon as 2023, with earnings reaching $640 million in 2025 and $1 billion in 2028. Morgan Stanley's price target of $23 per share represents a 16 times earnings trading multiple, higher than its peers, which trade around 12x forward earnings. "In our view, DraftKings deserves a premium as an almost pure play on US sports betting and iGaming, in contrast to peers that either have brick-and-mortar or int'l regulatory risk," said Allen. The current state of sport betting is uncertain due to the c