Can investing $100,000 in DraftKings stock make you a millionaire?

Here’s the good news/bad news situation for the U.S. sports betting business. DraftKings (D.K.N.G. -1.93%), I think so. The good news is that gambling facilitators are earning a lot of money these days. The bad news is that the state is taking note and may take a bigger cut of the proceeds.

In at least one state, the scale of the cut may alarm some would-be DraftKings stock millionaires. This is something to consider for anyone thinking about betting $100,000 with the hopes of earning 10x the return. But in the long run, taking a smaller stake in the company can be a very reasonable bet.

DraftKings stock falls amid tax confusion

If there’s one thing markets hate, it’s uncertainty. Unfortunately, it is not entirely clear what the long-term impact of higher taxes on sports betting operators in Illinois will be.

DraftKings shares fell 11% on May 28 as Illinois lawmakers approved the 2025 budget with a provision creating a progressive tax scale that would more than double the top tax rate for sports betting operators like DraftKings. The current tax rate is 15%, but under the new legislation, the tax rate on these companies’ adjusted gross profits will increase to up to 40% for the largest operators. This tax bill may end up being greater than the actual profits the company derives from doing business in that state.

Going back to the topic of uncertainty, it’s not yet clear exactly how much of a burden the Illinois tax rate increase will put on DraftKings. It’s also unclear whether other states will follow Illinois’ lead and raise their own tax rates on sports betting operators.

The immediate and steep selloff in DraftKings stock indicates that some traders feared a worst-case scenario of what I call “tax bill contagion.” It’s probably unwise to bet your entire $100,000 on DraftKings stock now (assuming you’re not working with a portfolio the size of Warren Buffett) because the company’s future is so uncertain.

This doesn’t mean DraftKings stock can’t rise 10x over the long term and turn $100,000 into $1 million one day. As far as I know, a change in the tone of the conversation could trigger another major rally in 2020-2021. “We expect the debate to shift to how much higher taxes can be offset by reducing investments in customers,” said Needham analyst Bernie McTernan.

It’s not about one state or country.

If DraftKings’ investors feel better, the company will take profits from more than one state and country. DraftKings currently promotes iGaming in five U.S. states and mobile sports betting in 25 states. We also offer sportsbook and iGaming products in Ontario, Canada, and are preparing to launch sportsbook products in Puerto Rico.

However, there is a saying that goes, “More money means more problems.” DraftKings recently raised its fiscal 2024 revenue guidance range from $4.65 billion to $4.9 billion, up from $4.8 billion to $5 billion. This is encouraging, but with tax contagion looming on the horizon, this guidance hike may not boost investor morale.

Then there is a completely different problem that is very relevant. It’s certainly no coincidence that DraftKings stock has seen notable multibagger moves in 2020 and early 2021, when interest rates were relatively low in the U.S. and inflation was not a top concern. If there’s anything that could help turn a $100,000 investment in DraftKings stock into something worth $1 million, it would be a pivot to Federal Reserve policy rather than changes to state-by-state tax codes.

If central bank policy ultimately provides a tailwind for DraftKings and the company can continue to grow revenue as quickly as it did in the first quarter of 2024, shareholders should have a decent chance of hitting the jackpot. But that’s a big “if”, so it doesn’t make sense to put all your chips on a single bet. Therefore, enthusiastic high rollers should consider reducing their positions, tempering their optimism with an appropriate level of realism, and betting under $100,000 on DraftKings stock.