A significant portion of DraftKings (NASDAQ: DKNG) shareholders are expressing dissatisfaction with the gaming company’s recent decision to impose a surcharge on winning sports bets in Illinois, New York, Pennsylvania, and Vermont.
According to a recent Jefferies Equity Research report, 60% of surveyed DraftKings investors oppose the plan, which was unveiled alongside the company’s second-quarter earnings report. This level of disapproval might come as a surprise, especially since DraftKings indicated that the small surcharge could enhance earnings before interest, taxes, depreciation, and amortization (EBITDA).
DraftKings has projected 2025 EBITDA to be between $900 million and $1 billion, excluding potential gains from the surcharge, which is set to be implemented in the aforementioned states starting January 1.
The announcement of the surcharge has sparked significant debate within sports betting circles. Experts have pointed out that while Vermont is a small market, and Pennsylvania allows promotional spending to be deducted from taxes, the surcharge plan is likely to have the most impact in Illinois and New York. Illinois recently adopted a graduated tax on sports wagering, requiring higher-revenue operators like DraftKings to pay more taxes than smaller competitors, while New York’s 51% sports betting tax is the highest among major states.
Concerns Among DraftKings Investors About Competitor Reactions
Following DraftKings’ announcement, industry observers and investors have speculated on whether competitors, particularly FanDuel, will adopt similar measures. FanDuel’s parent company, Flutter Entertainment (NYSE: FLUT), is set to report its second-quarter results on August 13.
This has raised concerns that DraftKings’ rivals might use the surcharge against it. So far, only Rush Street Interactive (NYSE: RSI) has publicly stated that it won’t implement a similar surcharge. BetMGM and Caesars Entertainment recently reported their financial results without mentioning plans to introduce a tax on winning bets.
Mixed Reactions to DraftKings Surcharge
Opinions on the surcharge are divided, as reflected in the Jefferies survey.
“Some believe the risk is significant unless DraftKings has intelligence suggesting more states will increase taxes,” noted Katz. “In the best-case scenario, the surcharge could offset some of the tax burden. In the worst case, it could lead to a loss of market share and force a strategic reversal.”
On the other hand, shareholders who support the decision see it as a potential industry positive that could improve DraftKings’ free cash flow. They also believe bettors should be more informed about the tax structures in their states and are not convinced that FanDuel will quickly follow DraftKings’ lead.
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