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DraftKings Is ‘Too Big an Opportunity to Ignore.’ Why This Analyst Thinks It’s a Buy.

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Signage at the DraftKings Sportsbook at The Brook ribbon-cutting in October 2020, in Seabrook, New Hampshire.
Scott Eisen/Getty Images for DraftKings

Online sports betting can stage a strong comeback this year, making DraftKings a solid wager, according to analysts at Morgan Stanley. Penn National Gaming also received an upgraded from analysts at Macquarie Research.

Morgan Stanley analyst Thomas Allen upgraded DraftKings (ticker: DKNG ) to an Overweight from Equal Weight. He maintained a $31 price target on the stock in a report titled “Too Big an Opportunity to Ignore; Upgrade to Overweight.”

“While we and the market have been focused on near- to medium-term profit concerns, we believe at the current price one should not ignore that DKNG is a leading market share player in what will be a very large profitable market,” Allen wrote in a research note on Wednesday.

The move sent DraftKings stock climbing 16.4% to $22.48 on Wednesday.

Gambling is a highly profitable business with high barriers to entry that Allen believes could grow to $21 billion by 2025. Experts believe California could legalize online spots betting this year, following recent moves by New York, Louisiana, Ohio, Maryland, and Nebraska. These launches could drive additional upside to DraftKings, given that the company is already a leader in the industry and well-positioned to reap the benefits of an expanded market, the analyst added.

DraftKings stock has lost around 65% over the last 12 months, dropping 30% this year alone amid a wider market selloff. But Allen said the drop has gone too far, even though the company has yet to turn a profit. He predicted that revenue could grow by 63% in 2022, and by 38% annually through 2025.

Despite the months-long selloff, analysts are cautiously optimistic about the stock. Of the 32 analysts covering the shares, 19 rated them a Buy or Overweight, 12 rated them a Hold, and one has a Sell rating.

Separately, analysts at Macquarie Research upgraded Penn National ( PENN ) to Outperform from Neutral and raised their price target to $80 from $71. Penn shares were gaining 4.7% to $45.22. The stock has lost around 13% this year, and 54% over the last 12 months.

Penn National has underperformed the gaming group over the last year due to lower market share and tough gaming comps, Macquarie Research said, adding that with the stock now trading in the lows $40s, “we believe the market is giving little to no value for the online business.”

Penn is building up its digital platform in a “massively different way than peers,” which will allow it to curtail losses, the analysts at Macquarie Research said. Management has indicated that the company plans to be profitable by 2023, and Macquarie believes this is likely given that the company has done a solid job of fixing its balance sheet. Going forward, the analysts expect an imminent launch of Canadian operations to catalyze the stock, as well as sustained margin expansions.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

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