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

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