DraftKings (NASDAQ:DKNG) has come a long way by offering homebound everybody the opportunity to engage in sports betting, even if going into a casino seems like a bad idea right now. With sports getting back into play as well, the current conditions bode well for DraftKings, and the recent move to offer up some new debt underscores that point well.
Investors Demand DraftKings Go Deeper In Debt
In what may be one of the biggest surprises of the year so far, investors seemed fairly unified on the notion that the company they were invested in should go deeper into debt than already planned. The company was poised to offer $1 billion in convertible senior notes. That changed recently to $1.1 billion, and investors pretty much cheered while buying more stock. Amazingly, when the plans to offer $1 billion in debt were first announced yesterday, the stock actually lost value but seems to have recovered on the notion of offering more debt.
Reports from the company suggested that it was looking to take on more debt in support of “general corporate purposes,” as well as the ability to have more working capital available on hand to support other operations. This likely rings hollow with at least some investors, as the company reportedly already had around $1.8 billion in cash on hand.
A Fairly Stable Analyst Perspective
Meanwhile, the analysts—based on our latest research—are holding a fairly straight line on the company's overall assessment. It's been rated a “buy” for the last six months, and though the ratios have changed somewhat, the aggregate has always remained fairly bullish.
Six months ago, the company had four “hold” ratings and 11 “buy” ratings to its credit. That slipped a bit toward bearish three months ago, as the company had eight “hold” ratings and 17 “buy” ratings. Bullishness recovered as the company somehow managed to add a “sell” rating, but also bring in six “hold” and 20 “buy” ratings. That's where we are today, with one “sell”, six “hold” and 20 “buy” ratings.
The price target, meanwhile, has been skewing upward for the same interval. Six months ago, it came in at just $48.80. Three months ago, that jumped to $56.52, and then a month ago, sparked up again to $59.37. Another large jump came in with today's figures, where the current target stands at $65.96. This is actually the first time the price target has represented downside risk, as the company sells at $69.22 as of this writing.
A Confluence of Factors Defining the Future
DraftKings has made a lot of headway on the notion of letting people bet on sports from just about anywhere there's a decent internet connection. For the most part, that's a great plan—website empires have been built on shakier propositions than that—but in DraftKings' case, it's not all sunshine, rainbows, and free passes to the crab leg buffet.
Competition to DraftKings' services are just about everywhere—DraftKings only comes in rated fourth in PlayUSA's top five figures for Michigan casinos—and that's going to put some strain on DraftKings' ability to provide service. What's more, the notion of online betting may be losing some ground. Reopening casinos are cropping up all over, and that's inviting bettors to regain a slice of normalcy lost since March of last year. While that's not going to remove DraftKings and other online betting operations from consideration altogether, it's likely going to crimp the flow of customers by a certain amount.
Moreover, the move, in general, has to prove confusing to investors. Why would a company that already has nearly $2 billion in ready cash move to get its hands on another $1.1 billion? There's always something to be said for a stable cash balance; “have an emergency fund” generally shows up within the top two or three items on most any financial advisor's list. Why, however, does a company that already has an emergency fund—one that's actually larger than the gross domestic product of Belize at last report—want to pull in an extra 50% or so on top of the current balance?
Maybe DraftKings has an expansion planned. Maybe it just wants more cushion because it's expecting a downturn. Whatever it is, the company's looking to offer more debt and the market seems reasonably happy about the prospect. The company going forward looks pretty secure, so buying in on this debt should make sense; with over double what it's looking to acquire already on hand, paying it back shouldn't be an issue. DraftKings should be a solid proposition going forward, even if it's got plenty of competitors eager to get a slice of its market pie on their own plates.
Companies in This Article:
