"Expectations Are Too High" - Morgan Stanley Downgrades Penn And DraftKings

Shares of sports betting companies, DraftKings and Penn National Gaming, slumped Friday after Morgan Stanley published a new note downgrading both to equal weight from overweight amid extreme valuation concerns. 

"DKNG and PENN have both more than doubled since the start of the year. While we think a lot of the increased value is valid, we are concerned investors' expectations are too high and see six potential negative catalysts through" the end of the year, Morgan Stanley analyst Thomas Allen wrote. 

Allen outlined six potential, near-term risks for DraftKings and Penn that suggest it's time for Robinhood traders to cash in those chips before the recent loss of momentum in both stocks turns into a correction. 

  • A reversal of "stay-at-home tailwinds;" 

  • Lower consumer gambling trends thanks to the fiscal cliff, or lack of stimulus round two;

  • Increased competition in the sports betting industry;

  • Lack of progress in additional legalization of sports gambling;

  • Increasing prospectus of NFL season being canceled; 

  • Insiders selling stock (read: "DraftKings Insiders Dump $596 Million Of Stock On Unsuspecting Robinhood Daytraders"

Despite the downgrades, Allen increased DraftKings' price target to $37 from $26, along with Penn's target to $55 from $49 per share.

The downgrade is mainly due to valuation concerns; DraftKings is up 267% and Penn +1,339% since lockdowns began in early March. Readers may recall we've noted the insane moves in both stocks, even pointed out the moves happened in a period when all sporting events were canceled. As some major league games return, such as MLB, NBA, and NHL ones, both companies remain price for perfection. 

Allen believes sports betting and online gaming could be a $12 business by 2025, as both DraftKings and Penn are "arguably the purest plays" on legal sports and online betting.

Draftkings

Penn

The recent loss of momentum in both stocks suggests a correction nears.