DraftKings, Inc. (DKNG), a sports betting company that rose to fame during the pandemic days, has been named a top pick in the North American gaming and lodging sector by a team of Morgan Stanley analysts led by Stephen Grambling. DraftKings shares have declined more than 12% in the last month amid unfavorable policy developments, including the Illinois Senate’s successful passing of a budget bill that includes a proposal to increase taxes on sports betting from 15% to 40%. Illinois is one of the 25 states in which DraftKings operates sports betting. Morningstar analyst Dan Wasiolek estimates this tax hike to result in a maximum of 2% revenue hit to DraftKings, which suggests the market reaction to this negative development is an exaggerated move.

Morgan Stanley analysts praised the company’s decision to reiterate full-year earnings guidance even after accounting for this tax increase, which suggests the company is on track to mitigate this impact through cost-controlling measures. Morgan Stanley has assigned a price target of $51 for DraftKings, implying an upside potential of 35% from the current market price.

How Draft Kings Works

Draft Kings, founded in 2012, is one of the major players in the daily fantasy sports market in the United States. Fantasy sports allow participating players to win cash prizes for winning games. In addition, the company operates a sports betting platform covering major global sporting events. Currently, DraftKings operates in more than 15 global markets.

Morgan Stanley’s bullish stance for DraftKings stems from the belief that the company will not be majorly impacted by the recent tax reforms in Illinois. In addition, analysts believe that DraftKings will benefit from a stable regulatory environment for sports betting in the foreseeable future with no major decisions pending in the next few quarters. Boosting analysts’ confidence further, recent market trends suggest the demand for sports betting is at a healthy level despite inflationary pressures.

What Investors Need To Know

In 2018, the U.S. Supreme Court allowed state governments to legalize sports betting. Since then, the industry has grown into a $10 billion business, according to the latest Goldman Sachs data. Ben Andrews, the head of leisure and travel research at Goldman Sachs, projects legal spending on sports betting in the U.S. to reach an annual value of $45 billion when the market matures in a few years. This stellar growth leaves ample room for the majority of players in this fragmented market to grow. DraftKings has been gaining market share in recent months, which is an encouraging sign. In Q1, DraftKings’ share of the sports betting market rose to 31% from 27% at the end of last year. The company, which has been collecting invaluable customer data for a few years now, is well-positioned to leverage such data to offer better products in the future, which should ramp up its profitability in the long run.

Neither Dilantha DeSilva nor Stocks.News has positions Draft Kings.