Stocks, it seems today, only go down.
But the slide is more significant for some companies. Specifically, it matters most to those who might need to turn to the market for more cash.
DraftKings cash crunch?
Both DraftKings and PointsBet fielded multiple questions about their cash reserves during the Q4 earnings season.
At DraftKings’ investor day, analysts asked specifically: “Do you have enough cash to become cash-flow positive?”
“Yes,” replied CEO Jason Robins. “If there’s anything I want people to take away from today’s presentation, it’s three things. One is that the playbook is working. Two is that if we execute that playbook, we can get to profitability. And third is that we have more than sufficient capital on the balance sheet to execute that playbook.”
DraftKings has around $2 billion in the bank, but posted a net loss of $1.5 billion in 2021. It potentially has less than two years cash on hand under current conditions.
Predictions are hard in US market
Not everyone is convinced DraftKings can reach its inflection point, however. For starters, cash burn is highly dependent on new state launches.
In turn, that is dependent on the whims of state legislatures and even public voters. If California sports betting comes online in 2023, for instance, that launch alone could cost more than most others to date.
As a result, Deutsche Bank said in a recent analyst note there is “ambiguity” around DraftKings’ path to profitability.
“We believe a valuation floor will remain fleeting until investors can more confidently identify the EBITDA/cash flow potential of the business,” Deutsche said. “Given what we deem to be distant and lofty targets … there is little change in our view.”
How else to get money?
If DraftKings does need to raise cash, they could look to sell debt or equity. But neither will be cheap.
“There is zero demand for a stock down -70% in 6 months,” said Adam Steffanus, global equity portfolio manager at Advisory Research. “The existing debt is trading at distressed levels.
“The reality is that you can always raise capital. But the price would be so punitive and dilutive and investors would react so horribly, that it’s not a viable option. The stock would fall another 20% if they tried an equity raise.”
Robins’s comments also suggest DraftKings would prefer not to raise more cash.
What next then for DraftKings?
So what are the alternatives? The easiest solution is to cut costs, starting with marketing spend.
DraftKings had $734 million of variable marketing spend in 2021. But that spend is directly correlated to new signups and active customers. Cutting it would hurt market share, especially with FanDuel pledging to keep spending.
Would DraftKings potentially have to accept lower market share in that case?
Should DraftKings look at M&A?
Another route could be to try to find more cash flow via M&A. Paul Leyland, an analyst at Regulus Partners, suggested DraftKings might be smart to merge with a profitable European operator.
“Who stands out as a cash-generating solid business that can easily do US licensing?” Leyland asked. “Betclic perhaps, Kindred? Or does bet365 decide it doesn’t want to do the totally organic route in the US anymore?
“Either way, I’d argue M&A is easier for (DraftKings) now that the valuation is reasonable. Because nobody wants your paper when you are worth $40 billion based on nothing.”
A new landscape
DraftKings, of course, is not alone in its current situation. Under similar conditions, PointsBet also has around two years of cash remaining.
CEO Sam Swanell said at Q4 he was “confident” in the cash position, but that the company might need to raise more capital in the future.
He admitted it might be tricky to raise cash at reasonable rates right now, but that might be a different question in 12 or 24 months.
“I think we have flexibility,” Swannell added. “If equity markets are looking poor at certain points in time, there are levers we can pull.”
Deal or no deal?
Those levers could well be in M&A. PointsBet has explored a potential joint venture with Yahoo Sports, industry sources said. Not everyone is enamored with that potential deal either.
“We’re skeptical it would offer anything more than incremental upside for PointsBet,” Eilers & Krejcik said in a recent note.
But that might be where pure-play US sports betting operators are at present. The deals are about incremental gains rather than transformation. It’s a new world and much like March Madness, the goal is simply to survive and advance.