Analysts see significant benefits accruing to DraftKings (NASDAQ:DKNG) if speculation regarding a sizable agreement with Walt Disney’s (NYSE:DIS) ESPN unit comes to fruition.
Inside a DraftKings office. Analysts like the idea of an agreement with ESPN. (Image: Bloomberg)
Rumors to that effect emerged late Thursday, sparking an epic rally in the gaming company’s shares late yesterday. Cooler heads are prevailing today, with the stock trading modestly higher and as investors await confirmation of the deal — something neither the sportsbook operator nor Disney are providing as of yet.
We have a great, longstanding relationship with ESPN. However, we speak to a variety of companies on a regular basis and don’t comment on the specifics of those conversations,” according to a statement issued by the Boston-based gaming company.
ESPN reached marketing deals with Caesars Entertainment (NASDAQ:CZR) and DraftKings in 2020, so there is precedent for the media giant working directly with gaming companies. It’s not yet clear how a potentially expanded pact between the sports network and DraftKings would affect Caesars.
ESPN Deal Could Bring Advantages
Should DraftKings and ESPN come to terms, ,competitive benefits could accrue to the former, notes Oppenheimer analyst Jed Kelly.
In a note to clients today, Kelly points out a DraftKings/ESPN accord positions the gaming company to better compete with rival FanDuel, which launched its own network, while capitalizing as rivals such as BetMGM and Caesars Sportsbook pare advertising budgets.
The analyst adds an exclusive agreement with ESPN could be an ideal way for DraftKings to expand same-game parlays, which could be essential to profitability.
Last month, DraftKings said it’s allowing bettors to compile same-game parlays across multiple sporting events. For example, a client could piece together a same-game parlay on DraftKings with two legs from one game and another pair of legs from a game played later that day.
Kelly adds that DraftKings is one of a scant number of gaming companies with the resources to meet Disney’s scale requirements.
Maybe More Good News for DraftKings
One of the critical elements of an agreement with ESPN will be the extent of DraftKings’ financial obligations. Analysts are expecting a multi-billion figure, meaning there will be burden on the money-losing gaming operator to show investors the accord will pay dividends.
Exclusive of ESPN, DraftKings’ recent hold and net gaming revenue (NGR) data indicate the company is closing in on reduced losses.
“For Sept alone, we estimate elevated win rates offered a $25M NGR tailwind, which is partially offset by NGR headwinds from KS launching OSB in Sept (we model -$7M),” wrote Roth Capital analyst Edwad Engel in a report to clients today. “We increase our 3Q NGR/EBITDA forecast to $440M/-$316M vs the Street’s $430M/-$328M but see room for upside as lower promos/marketing and a lucky July/Aug flow through to the bottom line.”
He rates the stock a “buy” with a $25 price target, which is well above the Oct. 6 closing handle around $16.
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