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Shares of DraftKings (DKNG) are under pressure on Tuesday, Jan. 19 after Berenberg analyst Jack Cummins initiated coverage of the name with a Sell rating. After looking at the competitive landscape in the U.S. sports-betting sector, the analyst believes the market is "overoptimistic" about DraftKings and thinks the upcoming migration to the SBTech platform could lead to operational challenges and lost market share.

Market 'Overoptimistic'

Berenberg analyst Jack Cummins initiated coverage of DraftKings with a Sell rating and $41 price target, as he thinks the market is "overoptimistic" about DraftKings after looking at the competitive landscape in the U.S. sports-betting sector.

While Cummins is bullish on the size of the U.S. market, which he expects to reach $22 billion in terms of gross gaming revenue in 2025, the analyst is less confident in DraftKings’ chances of success. He believes the upcoming migration to the SBTech platform could lead to operational challenges and lost market share.

Cummins also questions the competitiveness of the SBTech product given its existing client base and recent client losses. Further, he believes valuation looks full, and while he accepts the U.S. market deserves a premium, when adjusting for other revenue streams and focusing on U.S. sports-betting and iGaming, DraftKings looks "overvalued versus peers." The analyst thinks any loss of share, combined with its current valuation, would temper sentiment and push the shares down.

Meanwhile, Cummins also raised the firm's price target on Flutter Entertainment (PDYPY) to 14,300 GBp from 10,400 GBp, while keeping a Hold rating on the shares. The analyst noted that Flutter’s shares have performed exceptionally over the past year, leading to a rich valuation.

While some of the premium to peers is certainly justified by the consistent performance in the U.S. and the high probability that Flutter will remain market leader, he sees little room for further multiple expansion from these levels.

Additionally, Cummings raised his price target on Entain (GMVHF) to 1,730 GBp from 1,175 GBp, keeping a Buy rating on the shares. The analyst acknowledged that Entain remains his preferred way to play the U.S. opportunity.

While the company’s BetMGM brand - through its JV with MGM (MGM) - is currently lagging behind its two closest competitors, Flutter and DraftKings, the progress made in fiscal year 2020 should not be ignored, he contended. Cummins expects BetMGM to continue to take market share in the U.S.

MGM Not Making Bid For Entain

MGM Resorts announced this morning that, "after careful consideration and having reflected on the limited recent engagement between the respective companies regarding MGM's rejected all stock proposal at an exchange ratio of 0.6-times," it does not intend to submit a revised proposal and it will not make a firm offer for Entain.

"BetMGM, our U.S. sports betting and online gaming venture with Entain, remains a key priority for the company as we continue to leverage our preeminent physical gaming, entertainment, and hospitality platform to expand digitally," said Bill Hornbuckle, CEO of MGM Resorts International. "We believe that BetMGM has established itself as a top three leader in its markets and we remain committed to working with Entain to ensure its strong momentum continues as it expects to be operational in 20 states by the end of 2021."

Responding to MGM Resorts' no intention to bid statement, Entain said that:

"The Board of Entain plc notes the announcement made earlier [Tuesday] by MGM Resorts International, or 'MGMRI,' that it does not intend to make an offer for Entain. As a result of the announcement, MGMRI and its concert parties are bound by the restrictions contained in Rule 2.8 of the City Code on Takeovers and Mergers. Entain has a clear growth and sustainability strategy, backed by leading technology, that it is confident will deliver significant value for stakeholders. We look forward to continuing to work closely with MGMRI to drive further success in the U.S. through the BetMGM joint venture. Entain will announce a Q4 Trading Update on Jan. 21, 2021."

Entain Remains 'Highly Attractive'

Commenting on MGM's announcement, Jefferies analyst James Wheatcroft told investors that he believes Entain remains "highly attractive." MGM's approach has "flagged the significant opportunity" in the U.S. for BetMGM, Wheatcroft noted, adding that Entain still offers double-digit online revenue growth, online scale, proprietary tech stack, and upside from BetMGM.

He kept a Buy rating on Entain's shares with a GBp 1,450 price target. Wheatcroft expects the share price to reflect the "strong underlying momentum" and recent Enlabs acquisition, offset by some uncertainty around the recently announced CEO departure.

Price Action

In morning trading, shares of DraftKings have dropped over 4% to $51.55, while MGM's stock has gained more than 3% to $30.81.