DraftKings (NASDAQ:DKNG) stock will get a major boost from a very smart move the company made this week. The sports gaming firm announced, priced, and closed within three days a secondary offering of stock at $40 per share that will bring in more cash to the company.
In total, 40 million shares were sold, of which 16 million came from newly issued shares of DKNG stock. By my estimate, those will bring in about $640 million (16 million shares sold at $40), before underwriters’ fees, with the net received of about $618 million.
But the underwriters also have the option of buying an additional 6 million shares. DraftKings did not say whether those shares would come from newly issued shares. If we assume that the same ratio of company share to insider share sales applies as the secondary offering (16 divided by 40), then 40% would go to the company. That would bring in an additional $96 million from the transaction.
Chock Full of Cash
In sum, the sports betting disruptor has just raised an additional $714 million, or likely $710 million after expenses. That is a very smart move. It takes advantage of the DraftKings stock price doubling since May 1 and helps provide more capital to the company.
In addition, it helps relieve selling pressure from existing insider shareholders. That is actually a positive move. The stock would have languished otherwise assuming that insiders would be trying to sell their stock after their lockups expired.
As of the end of March, the company had $158 million in cash, prior to completing its special purpose acquisition company (SPAC) reverse merger IPO. That event in late May brought in another $305 million or so from the subsequent PIPE investors (private investment in a public entity).
So now with the secondary offering completed, you can estimate that DraftKings has more than $1.17 billion in cash. That comes from the $158 million in cash as of March 31, the $305 million PIPE cash at the IPO and the $710 million issued in the secondary offering.
There could be slightly less based on expenses, the underwriters discount and their purchase of the additional 6 million shares, and whether those shares come from the company or insiders.
Balance Sheet Cash Helps DraftKings Stock
I estimate that there are now 745.5 million Class A and Class B shares outstanding after the secondary offering. That puts the DraftKings stock market value at $31.3 billion.
So at least this huge market value has tangible assets of 1.1 billion behind it. It provides DraftKings with the power to generate the cash flow it will need to justify that huge market value.
Seeking Alpha wrote last week that Oppenheimer analyst Jed Kelly had recommended DKNG stock. One of the reasons was that DraftKings will now spend $876 million on sales and marketing over the next three years.
They quoted Kelly as saying that the stock is being driven by huge pent-up demand for sports and related gambling.
What Investors Should Do With DraftKings Stock
Earlier this month, I pointed out in my last article on DraftKings stock that the company claims it will generate $1 billion in EBITDA. But it has not said when that will occur.
At least now the company has the fuel or firepower to be able to generate that level of EBITDA. But I am still skeptical of that level of earnings and cash flow. Can it occur before at least three or four years from now? I doubt it.
In addition, a number of other states will need to allow various levels of sports and other online gambling. This will allow the company to scale its operations.
I can now understand their business model better and whether the stock appears to be a bargain at today’s price. All of which leads me to conclude that, for the time being, I am not ready to buy the stock.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
