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Morgan Stanley Downgrades DraftKings, Penn National, Says Sports Betting Expectations High

After impressive 2020 share gains by the sports betting stocks, Morgan Stanley is downgrading shares of Draftkings Inc (NASDAQ: DKNG) and Penn National Gaming, Inc. (NASDAQ: PENN).

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After impressive 2020 share gains by the sports betting stocks, Morgan Stanley is downgrading shares of Draftkings Inc (NASDAQ:DKNG) and Penn National Gaming, Inc. (NASDAQ:PENN).

The Analyst: Morgan Stanley analyst Thomas Allen downgrades DraftKings with a price target of $37. Allen downgrades Penn National with a price target of $55.

6 Major Risks: Allen named six risks to investments in DraftKings and Penn National in a Friday note. They are: 

  • Reversal of stay-at-home and pent-up demand.
  • Lower or no stimulus checks.
  • Increased competition, especially with Barstool.
  • Disappointing additional gaming legalization.
  • The NFL season could be cancelled.
  • Expiration of DraftKings insider lock-ups.

Other Takeaways: The analyst praised the attractive growth of the industry and said DraftKings and Penn National are likely long-term leaders. 

The downgrade is mainly due to valuation, as both stocks are up over 100%, he said. 

Analyst and investor expectations for the industry are too high, Allen said. 

“When we initiated on DKNG, we highlighted that the average long-term market estimate for US sports betting was around $8 billion and iGaming around $3 billion,” the analyst said.

“Since then, expectations have risen considerably with sports betting estimates we found now averaging $13 billion and iGaming $7 billion, combined around 80% higher.”

Investors are expecting a $15-billion sports betting industry and $8-billion iGaming industry, Allen said, citing channel checks. 

Morgan Stanley maintains an estimate of $12 billion in sports betting and online gaming by 2025.

The analyst highlighted Penn National's upcoming launch of a Barstool app. 

“Based on Barstool’s significant awareness/engagement (100 million social media followers), we forecast it achieving 10% market share of US sports betting,” he said

Allen expects DraftKing's market share to fall from 30% to 25%.

Other Picks From Morgan Stanley: Along with pointing out risky valuations in DraftKings and Penn National, Allen other stocks in the sector he said are more attractive.

Boyd Gaming (NYSE:BYD) is trading at nine times 2021 estimated EBITDA. Allen raised the Boyd price target from $30 to $33 and maintained an Overweight rating.

Caesars Entertainment (NASDAQ:CZR) is trading at 10 times 2021 estimates for EBITDA.

Boyd and Caesars shares are down 10% and 20%, respectively, in 2020.

DKNG, PENN Price Action: DraftKings shares were trading down 4.56% at $37.28 at last check Friday. The stock is up over 240% in 2020.

Penn National shares were down 1.52% at $54.30. The stock is up 116% in 2020.