DraftKings Announces Massive Secondary Offering, Forecasts Q3 Revenue up to $133 Million

Posted on: October 5, 2020, 08:51h. 

Last updated on: October 5, 2020, 11:58h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

DraftKings (NASDAQ:DKNG) stock is tumbling Monday after the daily fantasy sports (DFS) provider said it’s selling 32 million shares of equity to raise capital, and that it expects third-quarter revenue of $131 million to $133 million.

DraftKings Share Sale
A DraftKings sportsbook in New Hampshire. Today, the company said it’s selling stock and expects Q3 sales of up to $133 million. (Image: New Hampshire Public Radio)

The company said sales increased 97 percent year-over-year, or 41 percent on a pro forma basis, assuming the midpoint of $132 million of the aforementioned range.

In a filing with the Securities and Exchange Commission (SEC), DraftKings notes its hold rate during the first few weeks of the NFL season was unusually low, and that its marketing expenses were high during the quarter.

Atypical hold rates from NFL wagering during the three months ended September 30, 2020 resulted in an estimated negative impact on revenue of approximately $15 million based on our historic average hold rate for online sports betting of approximately 6.5 percent,” according to the filing.

The company added its marketing costs for the September quarter will be $200 million to $210 million. The estimate drew unfavorable comparisons from some on Wall Street. Roundhill Investments CEO and co-founder Will Hershey said on Twitter this morning DraftKings is spending $200 million in a quarter on marketing.

Rival Penn National Gaming (NASDAQ:PENN) paid $163 million to acquire 36 percent of Barstool Sports. Penn recently said it had no advertising expenses through the first two weeks of live-action for the Barstool Sportsbook mobile app.

Joining the Share Sale Party

The share sale news is also weighing on DraftKings stock. But the company is joining a now-lengthy list of gaming companies and sportsbook operators that recently took advantage of rallying equity prices to tap capital markets for cash.

Of the 32 million Class A shares being sold, DraftKings itself is selling 16 million. Early investors are selling the other half.

The company will only collect proceeds on the tranche it’s selling. But underwriters have an option to buy another 4.8 million shares for up to 30 days. Based on the sale of 20.8 million shares at $59 (this is just an estimate, not an official statement from the company), DraftKings could raise $1.22 billion for general corporate purposes.

Some of the notable investors reducing their stakes in DraftKings, according to the filing, include New England Patriots owner Robert Kraft, board member Shalom Meckenzie, John Salter, and Raine Group. Meckenzie, the largest individual shareholder in the sportsbook operator, is selling $544 million worth of the stock. He’s the only director doing so. None of the investors are entirely liquidating their positions in the company.

Legend Hospitality, a group controlled by the Dallas Cowboys and New York Yankees, isn’t participating in the sale. Nor is Walt Disney, which owns more than five percent of DraftKings Class A stock.

More Tidbits

The primary reason Wall Street is enthusiastic about DraftKings is the growth of internet casinos and online sports betting. The operator is obliging, saying its online sports wagering handle for the September quarter surged 460 percent year-over-year, while its iGaming handle jumped 335 percent.

However, the company warned its third-quarter results may not be directly comparable with future periods due to the unusual sports schedule forced by the coronavirus pandemic.

“The unique sports calendar, with overlapping seasons for all four major US sports during a portion of the three months ended September 30, 2020, has also favorably impacted our handle in a manner that may not be representative of our performance in other periods,” said DraftKings in the regulatory filing.