Taxation contagion may make the sports betting company a riskier wager.
It’s a good news/bad news situation for U.S. sports betting businesses like DraftKings (DKNG -1.93%), it seems. The good news is that gambling facilitators are raking in plenty of revenue nowadays. The bad news is that state governments are taking notice and may seek bigger cuts of the proceeds.
In one state, at least, the size of that cut may cause consternation for some would-be DraftKings stock millionaires. It’s an issue to consider for anyone thinking about wagering $100,000 on it in hopes of 10x returns — but in the long run, taking a smaller stake in the company could be a fairly sensible bet.
DraftKings stock sinks on tax turmoil
If the market hates anything, it’s uncertainty. Unfortunately, it’s entirely uncertain what the long-term implications will be of Illinois’ tax hike on sports betting operators.
DraftKings stock tumbled 11% on May 28 as Illinois legislators approved a 2025 budget with a provision that would create a progressive tax scale that more than doubles the top rates on sports gambling operators like DraftKings. Their current tax rate is 15%, but the new legislation would push the tax rates on these companies’ adjusted gross revenues to as high as 40% for the largest operators. Those tax bills may end up being greater than the companies’ actual profits from doing business in the state.
Circling back to the topic of uncertainty, it’s not yet known exactly how heavily the increased Illinois tax rate will weigh on DraftKings. It’s also unclear whether other states will follow Illinois’ lead and hike their own tax rates for sports gambling operators.
The immediate, steep sell-off of DraftKings stock indicated that some traders feared a worst-case scenario of what I would call “taxation legislation contagion.” Since the company’s future is so uncertain, it would probably be unwise to wager a full $100,000 on DraftKings stock now (assuming you’re not working with a Warren Buffett-size portfolio).
This isn’t to suggest that DraftKings stock couldn’t make a 10x move over the long term and turn $100,000 into $1 million someday. For all I know, a change in the conversation’s tone might prompt another massive, 2020-to-2021-style rally. To quote Needham analyst Bernie McTernan, “We expect the debate to shift to how much of the higher taxes can be offset by lower investments in the customer.”
It’s not all about one state or country
If it makes DraftKings’ investors feel any better, the company derives revenue from more than one state and more than one country. Currently, DraftKings facilitates iGaming in five U.S. states and mobile sports betting in 25. It also provides sports book and iGaming products in Ontario, Canada, and is making preparations to launch its sports book product in Puerto Rico.
But then, as the saying goes, “More money, more problems.” DraftKings recently raised its fiscal 2024 revenue guidance range — previously $4.65 billion to $4.9 billion — to $4.8 billion to $5 billion. That’s encouraging, but that guidance hike might not lift investors’ spirits now that taxation contagion may be on the horizon.
Then, there’s a whole other issue that’s highly relevant. Surely it’s not a coincidence that DraftKings stock made a notable multibagger move in 2020 and early 2021, when interest rates were comparatively low and inflation wasn’t top of mind in America. If anything could help turn a $100,000 investment in DraftKings stock into a position worth a cool $1 million, it would be a pivot in Federal Reserve policy rather than state-by-state changes to tax codes.
If central bank policy eventually provides a tailwind for DraftKings — and if the company can continue to grow its revenue rapidly, as it did in 2024’s first quarter — then shareholders should have decent odds of hitting the jackpot. Those are big “ifs,” though, and it’s not sensible to put all of one’s chips on a single bet. So eager high rollers should consider scaling back their positions, tempering their optimism with an appropriate level of realism, and wagering much less than $100,000 on DraftKings stock.
David Moadel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
