We recently compiled a list of the 10 Best Casino Stocks To Buy According to Analysts. In this article, we are going to take a look at where DraftKings Inc. (NASDAQ:DKNG) stands against the other casino stocks.
A Quick Recap of the Global Gambling Industry
The world has seen a rapid growth in online gambling recently, which is fueled by the legalization of sports betting around in many countries. The United States ban on sports betting was lifted in 2018 since then many states have moved to allow such activities online as well.
Makers of FanDuel and BetMGM have flooded the United States market with promotional content and advertising targeted at sports fans, encouraging them to participate in their fantasy leagues. Sports betting companies use various marketing techniques to cash in the sports seasons. In one of the BetMGM promotions, its brand ambassador Jamie Foxx, a movie star, encouraged sports fans to try betting on various outcomes in the game.
The advertisements have been working well to drive revenue for the companies. As per the American Gaming Association, in 2023, online sports bookmakers took more than $114 billion in Bets. Moreover, the US revenue from online sports betting reached around $16.9 billion during the same year.
After the United States, many other countries are working on building casinos to attract foreign tourism. As per a CNBC report on September 1, Thailand after Singapore and Macau is looking to develop casinos in the country. The strategy worked well for Macau as it overtook the title of the world’s largest gambling hub from Las Vegas. Singapore has been reaping the benefits as well from its two 14-year-old casinos. Thailand has now joined the race, and it is expected that the country will give tough competition to both Macau and Singapore. Its casinos are expected to generate $5 billion in revenue, which is 1% of the country’s GDP.
In one of our recent articles titled, 7 Best Small-Cap Casino Stocks Hedge Funds Are Buying, we found that Asia Pacific is one of the major contributors to the global betting industry. Here’s an excerpt from the piece:
“Legalization of gambling, rapid urbanization, increased use of social media, and rising internet penetration rate are factors driving market growth. As per the report, the Asia Pacific region is the main contributor in the global betting industry accounting for more than 32.4% of the total market valuation. The Asia Pacific region is followed by North America and Europe. Looking ahead, South America and Africa are expected to be the next hot markets for gambling and casino companies. The South American region is expected to grow at a CAGR of 23.4%, whereas Africa is expected to grow at 8%. Rapid legalization and increasing disposable income in these regions contribute to the growth.
If we look at the segment-wise analysis, the lotteries segment accounts for more than 53% of the total market value and is expected to grow at the fastest rate during the forecasted period.”
Are Sports Betting Stocks Slipping Due to the Upcoming Tax?
Illinois lawmakers are drafting a new budget that includes a sharp increase to the state tax on sports betting operators. On May 28, CNBC’s reporter Contessa Brewer mentioned that operators in Illinois have paid 15% on sports betting since it went live in June 2021. The new tax proposal is expected to increase the tax to a range of 20% to 40% depending on gross receipts. Meaning that the largest betting operators are expected to be attacked the highest with this increase.
The law is yet to be passed, but if it gets approved it will make Illinois’ highest tax rate the second highest behind New York and New Hampshire. For context, Illinois is the 4th largest state for sports betting and betters waggered more than $1.2 billion in March 2024 alone. Sports betting associations are not happy with the tax proposal. The CEO of one of the largest sports betting operators in the United States mentioned that the burden of this tax is going to shit to the consumers.
Now that we have looked at the overall gambling and casino industry. Let’s talk about the 10 best casino stocks to buy according to analysts.
Our Methodology
We used the Finviz stock screener to come up with stocks operating in the gambling and casino industry. First, we aggregated a list of casino stocks that were most widely held by hedge funds in Q2 2024. Next, we ranked them based on the average price target upside as per Wall Street analysts. The list is ranked in ascending order of the average price target upside as of September 1.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A woman at a betting table paying out customers who won their sports bets.
DraftKings Inc. (NASDAQ:DKNG)
Average Price Target Upside as of September 1: 44.93%
Number of Hedge Fund Holders: 56
DraftKings Inc. (NASDAQ:DKNG) operates in the digital sports entertainment industry. The company offers a variety of online services related to sports betting and gaming. It operates through various key segments including online sports betting, where users can bet on various sports events, Daily Fantasy League, a pioneer app that allows users to create fantasy teams and compete based on the real-time performance of the players, and iGaming, which includes casino games for states where gambling is legal.
The company faced some headwinds due to regulatory pressure from higher tax rates on sports betting. Regardless, DraftKings Inc. (NASDAQ:DKNG) had no problem growing its revenue by 26% year-over-year during the latest quarter.
It also achieved strong customer acquisition and increased its new customer acquisition by around 80% year-over-year, while simultaneously decreasing its customer acquisition cost by 40%.
Management is putting in efforts to improve its adjusted EBITDA to bring it between $900 million to $1 billion by 2025. Moreover, the management also plans to work around the higher tax issue by rolling out gaming tax for its customers in 4 states by next year.
DraftKings Inc. (NASDAQ:DKNG) has raised its revenue guidance midpoint, now indicating a 41% increase year-over-year. Management also expects the upcoming NFL season to considerably boost its earnings.
DKNG was held by 56 hedge funds in Q2 2024, with total stakes worth $2.25 billion. Marshall Wace LLP is the top shareholder, with a position worth $359.20 million. Moreover, 38 analysts have a Strong Buy rating on the stock, with their 12-month median price target of $50 presenting a 45% upside.
Baron Discovery Fund stated the following regarding DraftKings Inc. (NASDAQ:DKNG) in its first quarter 2024 investor letter:
“Shares of DraftKings Inc. (NASDAQ:DKNG), a leading online sportsbook in the U.S., rose during the quarter following an earnings release that showed strong market share gains and an improved outlook for future profitability. Market share capture has been driven by investment in innovative product offerings that are resulting in strong customer retention. The company also announced the acquisition of JackPocket, a digital lottery courier service. We believe the acquisition will help DraftKings achieve a first-mover advantage in many states that offer the JackPocket service but have not yet legalized online sports betting and casino gaming. DraftKings is well positioned to expand margins and generate positive free cash flow as it grows revenues alongside the rapidly expanding U.S. sports betting market, in our view.”
Overall DKNG ranks 5th on our list of the best casino stocks to buy. While we acknowledge the potential of DKNG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for a promising AI stock that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
