Piper Sandler sees big gains for DraftKings, Penn National as sports betting market expands

Published Fri, Nov 20 20208:57 AM EST

Jesse Pound @/in/jesse-pound @jesserpound

(This story is for CNBC Pro subscribers only). DraftKings and Penn National Gaming are poised to take a substantial piece of the growing online betting market, according to investment firm Piper Sandler. The firm initiated coverage of both stocks with an overweight rating on Friday, saying the sector has "numerous tailwinds" to help the stocks outperform the broader market. Sports betting has been spreading across the United States since the Supreme Court struck down a ban in 2018. Based on early returns in New Jersey and the interest from state governments to find new sources of tax revenue, Piper Sandler estimated that the market can grow to above $10 billion. "Extrapolating metrics from N.J., which we view as the most mature market outside of Nevada, we conservatively estimate the Sports Betting market can grow to ~$11B at ~65% of the U.S. population with access," the note said. That projection for sports gaming makes the the total addressable market for sports betting and iGaming, which includes online versions of traditional casino games, to $18 billion in Piper Sandler's base case scenario. In the firm's bull case, it says the market could rise above $40 billion. Those scenarios could make Penn National Gaming's investment in Barstool Sports payoff. Barstool produces sports gambling media content and has launched a sportsbook. Piper Sandler set a price target of $84 per share for Penn, which is 19% above where the stock closed on Thursday. "We believe Penn can leverage its investment in Barstool Sports to create a new revenue stream as well as infuse younger, more diverse customers to its database of > 20M members in its current loyalty program," the note said. Piper Sandler also noted that Penn National's brick-and-mortar casinos should rebound after the pandemic. For DraftKings, which is more of a pure-play sports gambling company, Piper Sandler set a price target of $58 per share. That is more than 17% upside from where the stock closed Thursday. DraftKings' history as a fantasy sports company should make it easier for the company to grow its gambling customers, Piper Sandler said. "We look for DraftKings to transition the > 4M paying users in its database of daily fantasy sports players to both sports betting and iGaming, creating a virtuous cycle of players that shift from one gaming product to the next," the note said.

Tennys Sandgren of the United States returns a ball during the singles match against Christopher Eubanks of the United States during the DraftKings All-American Team Cup on July 4, 2020 in Atlanta, Georgia.

Carmen Mandato | Getty Images

(This story is for CNBC Pro subscribers only).

DraftKings and Penn National Gaming are poised to take a substantial piece of the growing online betting market, according to investment firm Piper Sandler.

The firm initiated coverage of both stocks with an overweight rating on Friday, saying the sector has "numerous tailwinds" to help the stocks outperform the broader market.