Is it time to place a long-term bet on DraftKings (DGNG)? Thanks to a landmark Supreme Court decision allowed states to legalize betting, various states have opened up online betting which has accelerated the growth of the online gambling market over the past two years. But is DraftKings, the biggest name in the industry, a sure thing?
DraftKings stock has been under heavy selling pressure, falling more than 15% over the past week. And the shares, currently trading around $51, have plummeted more than 43% since reaching a 52-week high of $74.38. Current investors want to know if they should double-down on the stock, while new investors wonder if they should take their losses and walk away. Headquartered in Boston, DraftKings became a household name by offering daily fantasy sports contests with million-dollar prizes.
However, the company is scaling up its sports betting business. The stock’s punishment has been due to the company’s recently-announced M&A interest Entain, a U.K.-based online gambling company which owns the Ladbrokes and Coral betting brands. Seeking to to expand internationally, given Entain's licenses in 27 countries on five continents, DraftKings is willing to spend an estimated $20 billion on the deal. According to CNBC, the purchase price consists mostly of stock, though as much as 30% of the amount could come from cash.
But the deal not as straightforward as that may sound, given Entain’s partnership with casino operator MGM Resorts International (MGM). Both Entain and MGM Resort have a 50/50 joint venture called BetMGM, an online sportsbook for betting on NFL and NBA games. BetMGM currently controls an estimated 21% of the online sportsbook market, compared to 17% for DraftKings. This explains why DraftKings would want to consolidate that business. But this also means MGM Resort would need to consent to the deal to allow DraftKings to proceed with the acquisition.
It’s not likely that MGM Resorts' will consent, which means a battle over Entain’s asset could erupt. This is because Entain had already rejected an $11 billion offer from MGM Resorts in January, saying it undervalued the company. With DraftKings’ $20 billion offer now on the table, it’s possible that MGM Resorts — if they are still interested in an outright purchase of Entain — will engage in a bidding war. And this, for MGM Resorts, would be the best of both worlds since a bidding war would force the hand of a competitor.
DraftKings will report its Q3 earnings in November. Its earnings numbers have been dragged down by its aggressive spending on marketing to acquire customers. Investors will want to see the level of profitability improve, especially given the Q3 numbers will include the start of the new NFL season. Given the improved ratings of NFL and marquee college football games, it’s possible that DraftKings top- and bottom line numbers will be stronger-than-expected. And this could be the catalyst that the stock needs to rebound.
As to the M&A deal for Entain, it remains to be seen what unfolds in this three-way relationship with MGM Resorts. Given that the offer from DraftKings to Entain management was characterized as “serious,” I would expect DraftKings to continue to aggressively pursue and ultimately close the deal. As such, I believe DraftKings stock deserves a long look at current levels.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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