Posted on: August 6, 2024, 04:18h.
Last updated on: August 6, 2024, 04:18h.
A significant majority of DraftKings (NASDAQ: DKNG) shareholders aren’t happy about the gaming company’s plan to tax winning sports in Illinois, New York, Pennsylvania, and Vermont.
That’s according to a recent Jefferies Equity Research, which noted that 60% of surveyed DraftKings investors said they oppose the plan, which the operator announced last week in conjunction with its second-quarter earnings report. It could be argued that’s a larger-than-expected disapproval percentage because the company said the small surcharge could be additive to earnings before interest, taxes, depreciation, and amortization (EBITDA). DraftKings said its 2025 EBITDA forecast of $900 million to $1 billion doesn’t include potential benefits from the tax, which goes into effect in those states on Jan. 1.
Forty percent of those queried by Jefferies said they approve of the plan while a single investor expressed a neutral view on the matter. Jefferies analyst David Katz said he’s constructive on the DraftKings plan.
In the wake of DraftKings announcing the controversial effort, there’s been ample criticism and opining in sports betting circles. Some experts noted with Vermont being a small state and Pennsylvania allowing promotional spending to be deducted from taxes, it’s Illinois and New York that figure most prominently in the surcharge plan. Illinois recently moved to a graduated tax on sports wagering under which the highest revenue operators, such as DraftKings, pay more taxes than lower-grossing rivals. New York’s sports betting tax of 51% is the highest among large states.
Some DraftKings Investors Worried About Rivals’ Responses
Following the DraftKings announcement, industry insiders and investors alike have speculated about whether or not competitors — namely FanDuel — will follow suit. FanDuel parent Flutter Entertainment (NYSE: FLUT) reports second-quarter results on Aug. 13.
FanDuel could market against it and gain more share from new customers, irrespective of whether it leads to more EBITDA, which would be negative for DKNG shares,” wrote Katz.
That is to say DraftKings rivals could leverage the surcharge against it. To date, only Rush Street Interactive (NYSE: RSI) has publicly said it will not employ such a scheme, but BetMGM and Caesars Entertainment delivered financial results last week and there was no talk from either of potentially implementing a tax on a winning bets in any state.
Some DraftKings shareholders surveyed by Jefferies told the research firm they viewed the surcharge move as hasty and retaliatory, indicating it could come back to bite DraftKings in states such as Illinois and New York that are mulling iGaming legislation.
Dueling Views on DraftKings Surcharge
There are two sides to the surcharge coin and that was apparent in the Jefferies survey.
“Others indicated that the risk is high, unless DKNG’s intelligence suggests more states are likely to raise taxes,” added Katz. “The best case is you offset the tax increase in part, the worst case is you lose more share than you expect and have to reverse the strategy.”
Conversely, shareholders that are on board with the DraftKings decision believe it could be a positive for the industry and a boost the operator’s free cash flow. Investors in that camp also believe bettors should be more aware of the tax regimes in their home states. They’ve also reconciled that FanDuel may not immediately follow suit.
