Online sports betting platform DraftKings (NASDAQ:DKNG) has been a darling of the trading community in 2020. Even as the novel coronavirus pandemic took a toll on many stocks, DraftKings stock reached all-time highs this year.
But as they say, what goes up must eventually come down. October was a particularly horrendous month for the owners of DraftKings stock. Does this mean that it’s time to dump its shares and never come back?
Not necessarily. If you’ve been waiting for gravity to start affecting DraftKings stock, your wish has been granted, and you can now own the shares at a reduced price.
However, that doesn’t mean that you should go all in on DraftKings stock. A moderate position is warranted as the share price is still fairly high even after the October pullback.
A Closer Look at DraftKings Stock
Back in January, DraftKings stock was already starting to show signs of life as it ascended from $10.50 to $15. By early March, the share price had already reached $18, and the bulls were really getting excited.
Then the coronavirus crisis happened and DraftKings stock fell to the $11 level. However, a new bull cycle began for the stock as bored people were stuck indoors, and they turned to online sports betting as a hobby.
Thus, DraftKings stock rocketed up to $43 in June and even reached an astonishing 52-week high of $64.19 in early October. Unfortunately, gravity then took over and by the end of October, the share price had declined to $35.40.
That’s a steep pullback, but prospective buyers of the shares don’t have to view the decline as a bad thing. Overall, DraftKings stock is still pricey, but at least its valuation is more reasonable now. Therefore, folks who’ve been watching and waiting can now buy it without feeling like they’re chasing the stock at high prices.
The Shares Get Dumped
When you see a sizable price dip in a stock, it’s important to know why it happened. In the case of DraftKings stock, we can pinpoint a reason for October’s share-price decline.
During the pre-market hours of Oct. 20, a 1.7 million-share block of DraftKings stock was reportedly sold off. We’re talking about $71.7 million worth of DraftKing’s shares dumped all at once.
To understand why this might have happened, we need to look back to an event that took place in June. In that month, DraftKings conducted a secondary offering (that’s a fancy way of saying a private sale) of 40 million shares, priced at around $40 apiece.
The lockup period from that secondary offering ended in October. That meant that the buyers could sell their shares for a small profit. So it appears that at least one high-net-worth shareholder may have opted to sell the stock.
No Need to Panic
It’s also worth noting that in early October, DraftKings announced its intention to sell 32 million shares of its Class A common stock in a separate secondary offering. The company said it would use the proceeds from this sale for working capital and general corporate purposes.
Some folks might express concerns about the shares being diluted by by the company’s stock offerings . That’s a legitimate objection, and it’s one of the reasons I would only consider taking a small position in DraftKings stock.
That being said, I don’t believe that the secondary offerings are a reason to panic and abandon DraftKings stock altogether. The lockup period for June’s secondary offering has already ended and the related selling of shares has already taken place.
Probably the best way to proceed would be to keep an eye on DraftKings and see if the company continues to sell more shares. Moreover, shareholders should hold DraftKings accountable and insist that the company spend the proceeds from the secondary offerings in a responsible manner.
The Bottom Line
Now that we have some insight into why the DraftKings stock price may have dipped in October, we can make a more informed decision as to whether it’s reasonable to buy the shares now.
I would assert that it’s quite reasonable to purchase a small amount of DraftKings stock. Just keep an eye on the company as the dilution of its shares remains an ongoing concern.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.