DraftKings Shares Plunge, But Analysts Hold Firm Amidst Potential Tax Hurdles

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In a sudden twist of fortune, DraftKings (NASDAQ: DKNG) shares have plummeted 15.06% over the past month. This sharp downturn far surpasses the standard definition of a market correction and reduces the gaming stock’s year-to-date gain to a scant 0.77%. Despite this recent hiccup, certain market analysts maintain their faith in the stock’s potent potential.

Just this Tuesday, DraftKings became one of three distinguished stocks to be added to Bank of America’s esteemed US 1 List. This list is a compilation of the bank’s superior equity ideas among buy-rated names trading on American exchanges.

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Inclusion in the US 1 List demands that stocks meet certain criteria, such as being listed in the US and possessing an average daily trading volume of at least $5 million over the preceding six months. Consisting typically of 30 to 40 stocks, with a minimum of 25, the US 1 List is delicately balanced every time a stock is added or removed. Independently tracked data suggests that the US 1 List has outperformed the S&P 500 Index over the past year.

DraftKings joins the ranks of other prestigious stocks on the US 1 List, including the high-achieving semiconductor goliath, Nvidia (NASDAQ: NVDA), as well as already listed members such as Amazon (NASDAQ: AMZN) and Costco (NASDAQ: COST).

The recent ebb in the tide of DraftKings’ shares can be traced back to Illinois, one of the highest revenue generating states for sports betting. The state has implemented a graduated tax on gaming companies that asserts more significant levies on the largest operators in its jurisdiction.

DraftKings and competitor, FanDuel, will shoulder the heaviest burden of these increases as their average tax rate in Illinois will undergo a surge from the current rate of 15% to 36.5% come July 1. Conjecture continues to mount as to whether this tax hike could significantly drain the operators’ earnings in the state. However, debate among analysts is divided over whether Illinois’ progressive move might spark a similar trend in other states.

In the aftermath of Illinois’ sports betting tax increase, Massachusetts attempted a similar hike, but failed. Notwithstanding this setback, some analysts predict that tax hikes on online sportsbooks may be inevitable in other states.

DraftKings and its competitors may have means of circumventing these tax increases, such as revising marketing and promotional spending in states enforcing these increases.

Jefferies analyst, David Katz, in a note to clients, voiced his continued optimism about DraftKings’ position in the gaming market and increased his price target on the stock to $54 from $52. Furthermore, Katz suggested that higher sports wagering taxes could provide an impetus for DraftKings to seek more state approvals for its recently acquired online lottery provider, Jackpocket.