DraftKings (NASDAQ:DKNG) is having a year built on great expectations. Since going public in April 2019, DraftKings stock has climbed as high as $40 per share. Most of that growth was riding on expectations of stay-at-home gamblers doing business on the company’s online gaming sites.
And that’s a fair point. But DraftKings didn’t go public through a traditional initial public offering. So investors are trying to determine an appropriate valuation now that the company went through the IPO process. In June, DraftKings announced that it was selling 16 million shares of its Class A common stock. In addition, select shareholders will sell an additional 24 million shares of class A common stock.
Both offerings were priced at $40 per share, making the total offering size $1.6 billion. DraftKings said it would be using the equity for “general corporate purposes.”
In light of a global pandemic, the offering makes sense. But the story doesn’t end there.
The Birth of DraftKings Stock Is Causing Growing Pains
As I mentioned above, DraftKings didn’t go public through a traditional initial public offering. Instead, the company merged with a gaming technology firm (SB Tech) and Diamond Eagle Acquisition Corporation. As a result of that merger, DraftKings has 35 million warrants outstanding. The warrants (which work similar to call options) can be exercised to acquire stock.
Those warrants convert into an additional 16.3 million additional shares of stock that are going on the market later this year. But the story doesn’t end there. SBTech has a potential claim on 6 million additional shares if the company reaches certain agreed upon performance milestones. The company has also set aside 13.1 million shares to for employee stock compensation.
More Competitors Are Entering the Field
One of the bullish points on buying DraftKings stock was its status as a pure play in the online sports betting sector. But that’s where the novel coronavirus has hurt the stock the most. It’s given time for competitors to enter the field.
Without March Madness, the National Basketball Association (NBA) playoffs, the National Hockey League (NHL) playoffs and no start to the Major League Baseball (MLB) season, there were no sports for gamblers to bet on.
Now granted, that wasn’t good for MGM Resorts (NYSE:MGM), which introduced its BetMGM app just as sports was shutting down. But nevertheless, as sports begin to open up, there is more competition in the field. And it’s looking likely that New York may be gearing up to expand legalized gambling. That would make a key market for DraftKings much more crowded.
The Company Will Still Struggle for Revenue
Todd Shriber makes a case for DraftKings stock to continue to push higher.
In its short life as a public company, two things are becoming clear with DraftKings. First, some investors appear comfortable wagering on future prospects that may or may not arrive.
But as we move into the dog days of summer, it’s time for investors to begin to take its uncertain future into account. There’s no guarantee that the NBA’s or NHL’s “bubbles” won’t burst. The novel coronavirus is appearing to not care very much about man-made restrictions.
And the elephant in the room is professional football. It seems likely that college football will not take place. And if it does, there will be a significantly shorter season. But what of the National Football League (NFL)? It’s not an understatement to say a sports betting site without the NFL will suffer a revenue shock.
In my opinion, DraftKings has a good story. But it’s gotten really muddy, really fast. I don’t think any of the above factors are fatal to the stock. But they’re all happening at once. And at some point, investors are going to take a breath and look at the stock. And right now, it seems that the stock has a hard time justifying moving back to its $40 IPO price.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
