DraftKings (NASDAQ:DKNG) reported its latest figures for the March quarter showing it is burning through cash as if it was going out of style. As a result, despite recently purchasing Golden Nugget Online Gaming (GNOG), expect to see DKNG stock tank further.
I warned about this cash flow issue in my last article on February 25 on DraftKings when the stock was at $22.20. Today, May 9, it is down to $11.10, a drop of 50%. But that does not mean it can’t decline even further. This article will help you see why.
From its press release and Securities and Exchange Commission (SEC) filings on May 6, DraftKings reported negative cash flow. Its “net cash flows used in operating activities” (usually known as cash flow from operations or CFFO) was negative $356.7 million during the first quarter. This is on page 7 of its 10-Q filing. Moreover, after deducting $8.6 million in capex expenditures, its total free cash flow (FCF) was negative $364.82 million for the quarter.
This puts the DraftKings cash burn in an unsustainable situation. It means that on an annualized run-rate basis, cash burn will be $1.459 billion. Moreover, now that it has acquired GNOG, the cash burn is likely to increase.
For example, if we assume that this raises cash burn by 10% to approximately $1.6 billion a year, that could use up most of the company’s cash. It had $1.77 billion at the end of March. Depending on how much cash GNOG brings in with the combination, that might mean that in one year, three-quarters of the cash on its balance sheet will be eliminated or burnt through.
Where This Leaves DKNG Stock
By then, the stock will have cratered and it will be very hard for the company to raise equity at a suitable price. It may be forced to borrow and have to put up collateral. DKNG stock won’t stay at today’s price with its $4.9 billion market value.
For example, right now its book value (shareholders’ equity) is only $1.3856 billion. That is 71.7% below today’s stock market value. Moreover, if we deduct the goodwill and intangible assets, it falls to $246.9 million, or almost 95% below today’s price.
But let’s be generous. Even at two times the stated book value, the market value would fall to $2.77 billion. This is 43.4% below today’s $4.9 billion market capitalization. That means DKNG stock could fall to $6.23 from $11.02 today.
So, investors should watch carefully to see if DraftKings can get its cash flow spending under control. If not, DKNG stock could fall 43% more.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.