It’s been more than two months since I last wrote about DraftKings (NASDAQ:DKNG) stock. During this time, CEO Jason Robins has been extremely busy, although you wouldn’t know it from the company’s stock performance.
Down 5% since Aug. 9, investors seem to have grown impatient with all of the DraftKings CEO’s moves. None more significant than its possible $22 billion takeover of U.K.-based Entain PLC (OTCMKTS:GMVHY).
For some, it might appear DraftKings is merely throwing ideas at the wall, hoping that some of them stick. For others, the CEO’s deep desire to compete and win is fueling the company’s push for growth.
I believe it’s the latter. Here’s why.
Recent Moves Not Reflected in DKNG Stock
Since I last wrote about DraftKings in August, four major news stories have emerged:
- DraftKings announced the planned acquisition of Golden Nugget Online Gaming (NASDAQ:GNOG) in an all-stock deal valued at $1.56 billion. The move broadens DraftKings’ customer base, adding both revenue and market share. In addition, it expects to find $300 million in synergies post-closing.
- On Sept. 8, it announced the launch of DraftKings Rocket, the 37th iGaming casino game developed internally. Rocket provides a prize pool of $1 million and the opportunity to compete against other players for prizes. DraftKings now makes more than 500 games available on its casino product.
- On Oct. 13, it announced its deal with the National Hockey League to become an official sports betting, daily fantasy sports and igaming partner in the U.S. With the expansion of the NHL into Seattle, the interest in betting on NHL games has never been higher.
- Lastly, on Oct. 19, DraftKings announced that it would continue discussions with Entain about a possible merger. The company now has until Nov. 16 to make an official bid for the U.K. business. Although listed fourth chronologically, it is by far the biggest move in the company’s decade-long history. By combining with Entain, DraftKings gains a cash-flow positive business, operating internationally and accelerating its competition with FanDuel.
According to people who’ve worked and partnered with Robins, he’s someone who’s not afraid to bet big. Here’s what Bloomberg reported Oct. 14:
“Jason, throughout my experience, has been a guy who is willing to make bold moves in order to win,” said John Skipper, who led ESPN at the time of the 2015 deal and has partnered with DraftKings in his new media venture. “He’s very competitive. He’s long known where he wants to take DraftKings. Jason was not going to lose.”
Let’s assume for a second that $22.4 billion is the number and it’s an all-stock transaction. Based on a current price of $49, DraftKings will have to issue 457.1 million DKNG shares. Add that to 769.9 million shares (39.2 billion market cap divided by $49.14) and you get a market cap of $60.3 billion.
More importantly, you get TTM pro forma sales of $6.58 billion and free cash flow of $344.2 million.
That’s a price-sales ratio of slightly more than 9. Currently, DKNG stock trades for 17.7x sales. So, if DKNG has the same multiple post-merger, its market cap should be $116.5 billion, or 93% higher.
Not only is the potential Entain tie-up not accounted for, neither are the other three.
Right now, a lot of balls are in the air, and Mr. Market’s rightly or wrongly assuming Robins will drop them.
It’s a Hodgepodge Plan
InvestorPlace contributor Stavros Georgiadis wrote about some of DraftKings’ negative aspects at the end of September. He felt like four things were holding him back from recommending DKNG stock.
First, Robins is paying too much for Entain. The company rejected MGM Resorts (NYSE:MGM) in January. It was willing to pay $11 billion. So, my colleague feels the correct price is somewhere between $11 billion and $22 billion.
Georgiadis believes that the biggest stumbling block isn’t the price DraftKings might pay but instead that MGM’s BetMGM (Entain owns half) is a major gambling competitor. It’s hard to imagine it rolling over for DraftKings.
He discusses how DraftKings loses money, is burning cash, and allegedly operates in black markets. Buying Entain in an all-stock transaction would effectively eliminate the first two.
The last one about operating in black markets is absurd. There is no way the investors in SBTech or Diamond Eagle (SPAC sponsor) would have OK’d a three-way merger if there was any sense black-market gambling was happening.
Shorts like Hindenburg Research want to discredit DKNG any way they can. It’s a desperate act even for a short seller.
The Bottom Line
Phoenix-based venture capitalist Howard Lindzon’s Oct. 16 blog discussed how speculation is entertainment today. “With $11 trillion printed since COVID, we should not be surprised that speculation is a new form of entertainment,” Lindzon stated.
When I was in high school, I used to go with friends to the racetrack on Friday nights. For us, it was just like going to the movies, only better, because you were outside in the fresh air, watching beautiful creatures compete and race. The betting was secondary.
The same thing is happening today. The younger generation has found new forms of entertainment. Betting on sports is one of them.
Why spend hundreds of dollars to go to a football game when you can watch it at a bar with good friends and possibly make a little something on the game’s outcome?
From this perspective, all of Robins’ moves make sense. By pushing the limits for growth, it will ultimately pay dividends.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.