DraftKings will likely add another $900 million to its balance sheet from its most recent stock offering, but at what cost?
DraftKings priced its offering at $52 each for the 16 million new shares it will add to the market. That represents an 8.4% discount from Tuesday’s closing price and is 18.5% off the 52-week closing high of $63.78 hit last Friday.
Discounts for these types of offerings are common, but that big of a discount on DraftKings stock likely was unexpected.
The stock started to sell off on Monday after the placement was announced. That tumble continued Wednesday and Thursday after DraftKings confirmed the $52 offering price.
DraftKings stock new share count
DraftKings will have 375.8 million shares outstanding, assuming underwriters exercise their option on the additional 2.4 million shares available. They have 30 days to do so.
Those new DraftKings stock shares came from a few different places:
- The 18.4 million sold through this offering.
- The 16 million sold in another offering from June.
- The 17.6 million shares from the redemption of public warrants.
- Another 10 million in company stock awards, such as employees exercising stock options.
All told, DraftKings has increased its share count 20% since the company went public in April.
That’s a bit abnormal, said Macquarie analyst Chad Beynon, who recently initiated coverage on DraftKings with a $65 price target and overweight rating. Given the explosion of online gaming throughout the coronavirus pandemic, however, it’s not completely surprising.
“I think it’s gotten thrown into the software/consumer internet high-growth sectors where investors want to be,” Beynon said. “Investors want to be in any business that’s going to be growing 20% to 50% over the next couple of years.
“I think people view COVID as the great accelerator of certain industries. Some investors who may not have ever looked at a stock in the casino industry are interested in this because they think this is the accelerator from land-based gaming to online gaming.”
What’s all the cash for?
Right now, DraftKings Sportsbook is in customer acquisition mode, Beynon said. That’s obvious from the $200 million the company spent on marketing in the third quarter, which was about $50 million higher than most expected, he added.
On average, sports betting operators acquire customers for a cost between $300 and $400. The return on those customers over the next couple of years should be anywhere from six to 10 times that amount, Beynon said.
“As long as that equation holds true, that’s where the money is going to go,” he added.
DraftKings could also want the cash in case any attractive acquisition opportunities arise.
“I think they want to have money around to either enter an adjacent market or a new category,” Beynon said. “And having over a billion dollars of capital puts them in a great position to participate in any conversation.”
New York marketing could cost DraftKings $100 million
Beynon currently models marketing spending of $4 per person when DraftKings enters a new state.
That means the company could spend anywhere from $80 million to $100 million in year one on mobile sports betting in New York alone, he said. There’s still a possibility mobile betting could be legalized in NY soon.
Some of that investment started already. Sportsbook operators see professional team sponsorship deals as an alternative to TV ads, according to Beynon.
Others using cash to keep up
Beynon pointed to Pennsylvania as an example of what some non-market leaders face.
There are a handful of PA sports betting products that are unique and differentiated, but then there’s everyone else, he said.
Cash needs to be used to both upgrade technology and improve the product as well as throw bonuses at players to keep them coming back to lesser products, Beynon added.