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 coronavirus crisis; however, DraftKings CEO Jason Robins said the company saw record betting volume on the NFL Draft . "It shows that there's pent-up demand," said Robins. "COVID-19 today is having the clear negative effect of eliminating sporting events for people to bet on, but we expect resulting weaker state budgets to push more states to search for new tax revenues, and sports betting/iGaming to be the answer," Morgan Stanley's Allen added. Shares of DraftKings jumped nearly 2% in premarket trading on Thursday. — With reporting from CNBC's Michael Bloom.

DraftKings CEO and Co-Founder Jason Robins speaks during the unveiling of DraftKings headquarters March 26, 2019 in Boston, Massachusetts.

Darren McCollester | Getty Images

(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.

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