Not Financial Advice (NFA)
Warning: Wall of Text. If you hate reading just skim through the bolded/italicized
Ever since I publicized my findings on DKNG, the stock has underperformed & probably has fucked a lot of people here, especially given the overly bullish stance back in June. Unless you took my advice & got into Puts then, congrats, welcome to tendie town. For the ADHD retards, here’s what the next wall of text is going to summarize: I believe at the
current price of ~$30, the stock is oversold.
A tech-focused, high-growth Company that has made sports betting easy to understand with an aesthetically pleasing interface similar to how Robinhood has neatly laid out stock market gimmicks so even high-schoolers can make sense of it I believe, is underpriced at these levels.
Let’s get into some details as to why the stock has underperformed:
First off, the news slate revolving sports with the rumored delay/cancellation of the MLB season & the NFL watching from the sidelines is in my view, just a part of why the stock has underperformed. We’ll revisit this later in this post, but I want to focus on the drivers of the stock’s recent underperformance, & why these factors are now in the rearview mirror.
Part I – The Past Has Passed – SPAC-related Equity Dilution History lesson first: DKNG went public via a SPAC merger, which has exploded in popularity recently. Anyone serious about analyzing stocks going forward needs to do their homework on this, Google is your friend.
A feature of most SPAC merger to public listings that creates a headwind to near-term share prices are embedded equity dilution events, usually in the form of earn-outs (stock bonuses to execs, the SPAC sponsor) & conversion of Warrants.
On 5/24, the earn-outs were triggered, adding 6m shares to the share count.
On 6/26, 16.3m warrants converted to DKNG, netting them ~$188m of cash.
Stepping back a little, in addition to the above, on 6/18 DKNG launched a follow-on equity offering of 16M shares @ $40/Share [1], receiving $621M in proceeds.
The last part is tricky to understand from a dilution perspective. To simplify, historically it’s almost a coin toss whether a Company’s shares outperform on the onset of an equity offering. While issuing shares does dilute the existing shareholder base, it theoretically shouldn’t, if the proceeds from the offering are earmarked for investments/projects that yield outsized returns. This is the reality for the long term, theory for the short-term. For the short-term, the ‘reality’ isn’t that the proceeds will be used for investments/projects that yield outsized returns, it is more about how convincing management is to investors that the investments they intend to pursue with the proceeds will outweigh the dilutive effects of issuing incremental shares. That’s a mouthful, but hopefully you get what I’m trying to convey.
All of this stuff put together – the Company has increased its share count by ~39M, but now has a whopping
~$1.4Bn of cash [2]. More on this in the next section.
Part II – MLB News Should Not Fucking Matter & DKNG Is Positioned As the Leading Online/Mobile Sports Platform DKNG should not be so tied to MLB news or any of this shit as the ongoing success of the NBA/NHL season + Soccer in Europe has effectively created a blueprint on how to regulate player behavior so that they maintain professionalism amidst the pandemic. I’m going out on a whim here, but I truly think the MLB threatening a cancellation of the season is pure posturing to get these fuckers to behave appropriately. Maybe a ‘bubble’ is what it takes to get these players to focus on their jobs instead of going out & contracting COVID, but I argue that isn’t necessarily required given Soccer in Europe. So there’s already a proven path here without the need for a bubble in Soccer, so MLB/NFL should be fine, and execs need to study how they got it done in Europe. Okay, back to some facts.
Anecdotally, I’ve kept in touch with a handful of sports bookies from California to New York & even internationally about what they’re seeing – all of them say that since the NBA season started on 7/30 & since Soccer (especially the Premier League) resumed in June, along with other leagues like La Liga & Serie A, they’ve seen massive increases in betting.
These numbers are also showing up in the official data [3]:
- Average % increase in sports betting handle from April 2020 to June 2020 (handle is the total $ wagered in sports bets) from the states that reported up to June 2020 (NJ, PA, MS, RI, WV, IA, IN, NH) of +258%!
- Note: NV is left out due to the site I sourced showing a weirdly negative number – so I dug into the official filings & show specifically, Sports Mobile betting growth from June since April has growing by at least +73% [4]
REMEMBER: This is for June only! No NBA, No NHL, No MLB, just Soccer, Golf, NASCAR & UFC.
The data clearly shows that there was a ton of pent-up sports betting demand, which leads one Wall St. analyst to think that
betting on the NBA/NHL could ABSORB the MLB’s sports betting handle (handle = total $ size of sports bet) [5]. Remember, the MLB season is still ongoing, with games being played. The entire focus is on the Miami Marlins & St. Louis Cardinals. Fucking retards.
Additionally, I want to remind everyone that DraftKings.com is the
#1 Fantasy sports website in the U.S. [6]. Also, since April 2020 site visitations are up
+86% [7] & Google Search Trends for “Draft Kings” is up
~3x compared to PRE-COVID levels [8]. What does this mean? They are piquing more people’s curiosity than prior to COVID/ongoing slate of sports.
This is important because remember that ~$1.4Bn chest full of cash I mentioned DKNG had assembled earlier? Well, that money is being put to work & results are already coming in, which is exactly what DKNG intended to do with it.
Part III – Legalization of Sports Betting in the U.S. I could write a fucking bible on this topic alone, but for now we’ll stick to some basics. Due to COVID, it’s easy to understand that each State’s financial situation is clearly in shit. Because of this, you better believe that these guys are going to start taking a hard look at how they can extract additional tax revenues, & what’s one of the easiest ways to do this? Legalization & taxation of gambling.
The big players: CA, TX, FL & NY. First, CA pushing its legislation out to 2023 was fucked up, but here’s a twist I want to add to this: Anything that has to do with gambling in CA you better believe is lobbied against by not just the Tribal casino owners in CA, but by the deep pockets of Las Vegas money. Similar thing can be said for FL, but let’s take a look at some actions by LV/nationwide gambling companies that are starting to align financial incentives with guys like DKNG.
- MGM / GVC Holdings JV in BetMGM - $450m total invested
- PENN invests $163m into BS Sports
- Caesars has a 20% stake in William Hill plus partnership deals with The Stars Group (TSG) & our winner DKNG for operating its sports books
So it’s safe to say going forward, nationwide legalization of sports betting will reap rewards for everyone involved, & no longer be something LV money is completely focused on safeguarding.
Let’s also not forget that DKNG didn’t become the Company they are today because of their fancy app, but because their management team has a HISTORY of navigating the U.S.’s legal framework to get what they want out of it.
- The Crown Jewel – The Internet Gambling Prohibition & Enforcement Act: I said it in a previous post, but I want to emphasize that them getting Fantasy Sports to be labeled a ‘game of skill’ by FEDERAL Law as opposed to gambling is just something for the history books. Fucking genius shit. When this happened I bet every casino from LV to every Indian Tribe that has one was against it, yet DKNG & other DFS providers won.
- There’s more, but more recently: Getting into IL:
- In IL, there’s an 18-month ‘penalty box’ for Companies that offer DFS to offer sports betting. Our guys at DKNG created a workaround to this situation with their partnership with Casino Queen [9]. DKNG being savvy again.
These guys are at the cutting edge of creating legal frameworks to successfully launch their products & now with more of their ‘competitors’ financially aligned with them, combined with financial deterioration of State budgets, we should see an overweighting of good news vs. bad on the legal front.
Final Part – Share Price Targets Under-fucking priced at anything below $42.50 Near-term catalysts: 8/14: DKNG files 2Q’20 results, might be shitty, but you can bet that the Earnings Call is going to contain rhetoric on how massive the uptick in sports betting has been since late June/July.
Sometime from now until November: NY releases ‘study’ by Spectrum Gaming on online/mobile sports betting.
8/20 – 9/7: PGA Championship for FedEx Cup Title
9/5 – KY Derby
9/10: NFL KickOff Game
9/17: PGA U.S. Open Start Date
Month of October: NBA/NHL Playoffs
10/1: Estimated launch of online sports betting in TN
11/1: Estimated launch of online sports betting in VA
[1]
https://draftkings.gcs-web.com/news-releases/news-release-details/draftkings-announces-proposed-public-offering-class-common-stock [2] Wall St. Research – DKNG on 6/29/20
[3]
https://www.legalsportsreport.com/sports-betting/revenue/ [4]
https://gaming.nv.gov/modules/showdocument.aspx?documentid=16984; Note: Nevada did not break out April/May figures but from the Revenue difference of 3 month ended June 30 of 4,950 vs. month of June of 2,297 for a total difference of 2,653 spread evenly over April/May for a base case April estimate of 1,327.
[5] Wall St. Research - 7/27/20
[6]
https://www.similarweb.com/top-websites/category/sports/fantasy-sports/ [7]
https://www.similarweb.com/website/draftkings.com/#overview [8]
https://trends.google.com/trends/explore?geo=US&q=draft%20kings Feb 23-29, 2020 vs. Current Aug 2 – Aug 8, 2020
[9]
https://www.legalsportsreport.com/42314/draftkings-illinois-sports-betting-market-access/ submitted by 18 November 2020. Tags: COVID-19, Illinois. Casinos in the U.S. are having a difficult time crawling out from under the COVID-19 rock. States began to relax shutdown measures this past summer when ... All Illinois casinos, gaming venues ordered to close as of Friday Illinois Governor J.B. Pritzker announced Tuesday the state will be moving to tier three mitigations beginning Friday, Nov. 20 at 12:01 a.m. United States 11/18/2020 Gov. J.B. Pritzker and the Illinois Department of Public Health announced new restrictions on Tuesday amid a surge in coronavirus cases, hospitalizations and ... Arizona casinos open Friday with lines to get in. I have a neighbor that is fully prepared to bring his lawn chair out the night before when Vegas opens, like it’s a Black Friday sale. Illinois To Close Casinos, Slash Store Capacity, Stop Indoor Sports As Coronavirus Surges Across State . Without mitigations, daily deaths from COVID-19 could soon match the spring wave — or even go four or five times past it, Gov. JB Pritzker said. Kelly Bauer. 3:04 PM CST on Nov 17, 2020. A 'Face Mask Required" sign in an Argyle street store's doorway, seen on November 12, 2020. That ... Casinos in Illinois have been on a two month shutdown since mid-November with Gov. J.B. Pritzker giving some hope on Wednesday that the state may restart some businesses as early as January 15. Easing up of Restrictions Likely. Casinos in Illinois may be headed for a restart as early as January 15 with the state preparing to lift Tier 3 restrictions, said Gov. J.B. Pritzker on Wednesday during ... To avoid a stay at home order as COVID cases rise, Illinois Governor Pritzker announced Tuesday the state will be moving to Tier Three Mitigations beginning Friday, Nov. 20 at 12:01 a.m. Nov. 17, 2020. Illinois Gov. JB Pritzker will shut down casinos and video gaming terminals (VGTs) effective midnight on Friday, Nov. 20, according to the Chicago Tribune. The move comes as Illinois is in the midst of arguably its worst COVID-19 stretch to date. Along with gaming facilities, the governor is closing movie theaters, indoor recreational facilities and reducing capacity at retail centers during the busiest shopping season of the year. November 17, 2020 11/17/2020 9:00 pm SPRINGFIELD, Ill. (KMOX/AP) - The entire state of Illinois is under new, tougher restrictions as the state recorded more than 10,000 new COVID-19 cases for the ... The governor of Illinois has expressed optimism that the state might soon move out of Tier 3 lockdown, which means the casinos in the state are likely to be allowed to once again open their doors.. Governor J.B. Pritzker said Illinois’ 11 regions might begin easing restrictions on 15 January, as long as the metrics support it. November 20, 2020. Illinois executed its casino shutdown today, as the state moves back into Tier 3 restrictions. Some other forms of indoor recreation such as theaters and museums have also been forced to cease operations. This will last a minimum of 14 days, after which the state will reevaluate. Casinos may be permitted to reopen after that time if cases and hospitalization rates decrease, but this is unlikely.