DraftKings Stock Down 11% in September – Time to Buy DKNG Stock?

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The price of DraftKings stock has come down nearly 11% so far in September although it remains on positive territory for the year despite its latest choppy price action.

News about a potential acquisition of UK-based gaming company Entain (LON: ENT) contributed to plunge the price of DKNG stock as much as 7.4% yesterday at $52.8 per share as the deal would involve the issuance of a considerable amount of new common shares.

According to a statement from Entain released yesterday, a first offer of £25 per share from DraftKings was immediately rejected and that prompted the company to propose a second offer of £28 per share consisting of £6.3 per share paid in cash and the rest in Class A common shares. This last price represents a 46.2% premium compared to yesterday’s closing price for Entain stock.

The Board of Directors of Entain will carefully assess this last offer and will issue its decision soon.

For a company like DraftKings – which is currently being valued at $21.3 billion – this acquisition is quite large and may have a considerable impact on the performance of its business moving forward – especially if the premium paid turns out to be too high.

With this in mind, how could this acquisition affect the fundamentals of the company if Entain decides to accept the offer? Can DraftKing benefit from this transaction or is this a dangerous move for the sports betting firm? In the following article, I’ll attempt to answer some of these questions to draft plausible scenarios for the future for DKNG stock.

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DraftKings Stock – Technical Analysis

draftkings stock
DraftKings (DKNG) price chart – 1-day candles with multiple indicators – Source: TradingView

Yesterday’s downtick plunged DKNG stock back into a consolidation formation that it had managed to break in the past few weeks on the back of an upbeat earnings report. This break was accompanied by above-average trading volumes with a total of over 40 million shares exchanging hands during the session – a figure that was more than 3 times higher than the 10-day average.

As a result, momentum oscillators were pressed down to worrying levels with the MACD now broadening its distance with the signal line on the back of steadily increasing negative histogram readings.

Meanwhile, the Relative Strength Index (RSI) is moving near oversold levels and these two readings indicate a potential full-blown trend reversal in DKNG stock.

Moving forward, the outlook for DraftKings shares is bearish based on its current technical setup while the dilutive nature of the offer made to Entain could be the catalyst that further plunges the price of the sports betting stock if the Board of Directors of the British firm decides to accept the offer.

DraftKings Stock – Fundamental Analysis

At £28 per share, DraftKings would be offering to pay around $21 billion for taking control of Entain. If the Board approves the conditions of the offer as is, that would mean that the company will have to pay £12.34 billion ($16.8 billion) in stock.

Yesterday, the price of DKNG stock closed at $52.8 per share. Therefore, at least 318 million new shares of DKNG will have to be issued to settle the deal.

According to DraftKing’s latest quarterly report, the company had a total of 402.5 million shares outstanding which means that this deal would result in the issuance of nearly 80% the number of shares currently in circulation.

Moreover, DraftKings recently acquired Golden Nugget Online Gaming in an all-stock deal that valued the firm at $1.56 billion. The exact number of DKNG shares that would be issued to fully pay this deal was not disclosed but it resulted in another dilutive move for existing stockholders.

The reason why these acquisitions are, to some extent, dilutive, is that DraftKings is buying companies at a premium of their market value and this premium may depress the return on investment realized by the business from these operations.

Therefore, it could be expected that, if this huge deal for Entain goes through, the price of DraftKings stock may experience some downward pressure depending on how market participants appraise the impact that the takeover will have on the firm’s fundamentals in the long term.

Moreover, the cash portion of the deal would result in a $4.7 billion disbursement from DraftKings. By the end of the previous quarter, the firm had a total of $2.65 billion in cash and it is unclear how it will obtain the remaining cash to settle the transaction.

All things considered, this move seems too ambitious for a company of the size of DraftKings and may affect its future performance dramatically. Therefore, considering the dilutive nature of the acquisition, the outlook for DraftKing’s stock from a fundamental perspective is bearish as well.

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About Alejandro Arrieche PRO INVESTOR

Alejandro is a freelance financial analyst with 7 years of experience in the industry. He writes technical content about economics, finance, investments, and real estate and have also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing, macro analysis, and technical analysis. Other publications Alejandro has written for include The Modest Wallet, and Capital.com.