Sportico is reporting that Barstool Sports and DraftKings (DKNG) are in talks about a potential sports betting marketing deal.

Oppenheimer Managing Director Jed Kelly tells Yahoo Finance the potential deal "makes a lot of sense." "Barstool has proven that if you have a good product, which DraftKings clearly has a quality product, Barstool is able to take their personalities, do engaging content, and boost the brand," Kelly says.

Watch the video above to find out why Kelly thinks DraftKings stock has potential to move even higher.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Stephanie Mikulich

Video Transcript

- Betting on DraftKings in 2024 has proven a smart play so far. Stock's up about 9% year-to-date. That's outpacing the broader S&P 500. Our next guest believes this stock still has more room to run. And joining us now is Jed Kelly, Oppenheimer managing director of equity research. Jed, it is good to see you.

So I wanted to start, Jed, with these reports that I think are really interesting. You called out in a recent note these reports, Jed, that DraftKings is talking to Barstool Sports about this marketing partnership. I'm just interested what you made of those headlines, Jed? Does that make sense to you, DraftKings partnering up here with Dave Portnoy?

JED KELLY: Yeah. And this is a potential partnership, right, because it has to be after the Super Bowl with-- after the Penn lock-up. Yeah, it makes a lot of sense to me. I mean, it's low eight figures. So that probably implies it's something near the $10 million range. I think Barstool's proven that if you have a good product, which DraftKings clearly has a quality product, Barstool is able to take their personalities, do engaging content, and boost the brand.

Now, it's not a game-changer for DraftKings, by any means. But the deal does make a lot of sense. If you look at the success Barstool had for something like a High Noon, we think it makes a lot of sense. So yeah, we like the partnership. And it's low risk for DraftKings. And it's-- obviously, it's-- looks like a good deal for Barstool if it goes through.

- So Jed, again, assuming it does go through, what are we talking about in terms of the material gain for DraftKings as a result of it?

JED KELLY: I wouldn't call it anything really that material, right? We're talking about a $10 million advertising agreement. What it would do is you're still getting some of the most popular sports podcasts, right-- "Pardon My Takes," the number one sports podcast, "Spitting Chicklets," the number one hockey podcast-- "Fore Play's" the number one golf podcast, right? So you're giving them an effective medium.

However, you-- if you take a step back, I mean, DraftKings is still going to spend well over $600 million of marketing dollars, probably even more. It's not that game-changer. I think it just-- it makes sense. It was-- if you look at our note today, it was like, the fourth bullet point of our note. So-- wasn't the crux of today's report. But we do like the partnership.

- And Jed, looking at this stock, listen, it's been a monster, Jed. It's up 165% over the past 12 months. But you still like it here. What are the catalysts, Jed, that you think move it higher?

JED KELLY: Yeah. What you've seen, right, is DraftKings in '21, right, when interest rates were-- when inflation was going up and interest rates were going up, the speculative stocks like DraftKings got hit. But now what has gone on is since the state launches-- since the velocity of the state launches have sort of slowed, you are now seeing the sports betting stocks prove to investors that they can drive material profitability, right? Like, DraftKings next year is probably going to generate 55%, 56% incremental margins, 56% incremental margins.

So what is going to happen, right, as they're able to start to harvest meaningful contribution profit from vintage states, states that have been licensed since 2022? You're going to start to see them put up a big EBITDA number that makes a lot of your legacy gaming analysts, a lot of your legacy consumer analysts, start to actually anchor a valuation to. They sleep tight at night.

The other thing that we think is going to happen is they drive more profitability. They're eventually going to get GAAP profitable. And what happens when they become GAAP profitable? You can start to become in the index, right?

So we think for any consumer, gaming investor, this is going to be a core holding. And if you look at their medium-term EBITDA guidance, I think they're looking for over $2 billion of EBITDA by 2028. You put a mid-teens multiple on it, you're talking a significant amount of upside from where the stock is right now.

- Jed, the most formidable competitor for DraftKings now appears to be FanDuel, Flutter, the parent company, set to go public here in the US on Monday, already listed overseas. Does that listing in the US-- does that make any difference? Does that give them more firepower, for example, to compete against DraftKings?

JED KELLY: It doesn't make a difference operationally. I think it allows more investors to-- it gives them another option. However-- and when we don't cover Flutter-- but one thing I would point out is Flutter-- it's not a true apples-to-apples comp, right, because Flutter-- while FanDuel is operating awesome in the US, they have a lot of international segments that have been operating for over 20 years and are near terminal growth rate or terminal margins, right? So it's not a core comparison.

So yeah. Could you get some people do a pair trade? For sure. I think if you look at like-- if you look at right now competitively, Flutter's still holding a pretty decent lead with sports betting with FanDuel. They're doing a nice job with iGaming. I would say DraftKings is also doing a great job with iGaming.

But the one thing, too, if you're kind of comparing the two names if you still like DraftKings is DraftKings has more room to make up with the hold, right? I mean, I think DraftKings' structural hold's somewhere around 8.5%. FanDuel is about 12.5%, right?

So DraftKings has about-- call it 400 points of hold they could potentially make up. So you kind of have a little more room to grow. But both companies are operating very well in the US.

- All right. Jed Kelly, thanks so much. I really appreciate it-- setup also ahead of those DraftKings earnings in a few weeks. Appreciate it.

JED KELLY: Thanks for having me.