DraftKings shares sank nearly 7% after the sports betting firm offered weak guidance for the third quarter and indicated pressure on revenue from favorites dominating underdogs in NFL games.
The guidance and disclosures came in an SEC filing in which the company announced that it was selling 16 million shares of Class A stock, with owners of another 16 million also selling.
Shares in DraftKings dropped to nearly $59 a share in mid-day trading Monday. They had run up to a record high of $64.19 last weeks as investors cheered the return of sports, which have managed through myriad COVID-19 complications to offer a sudden spate of options for wagering and TV viewing.
Despite a surge in customers and transactions, total revenue should come in at $131 million to $133 million for the quarter, the company said, which would match expectations from Wall Street analysts.
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A hit to revenue came from the NFL. The company disclosed a lower-than-expected “hold” percentage from NFL during the quarter ending September 30. “Hold” is a betting term for the profitability percentage recorded by the bookmaker of a bet.
“Atypical hold rates from NFL wagering” will result in a $15 million revenue reduction, the company said in the filing, noting its usual hold rate is 6.5%. Already, the NFL sees a fairly low rate of underdogs winning games — about 34% in recent years — and upsets have been rare thus far during the initial weeks of the season, which started on September 12.
DraftKings went public earlier this year through a three-way merger involving a “blank-check” company set up by Hollywood veterans Harry Sloan and Jeff Sagansky, with Sloan staying on to serve as chairman.
In the SEC filing, the company said it expects to crack 1 million monthly unique players in the third quarter, up 64% from the same period a year earlier. As more states have legalized gambling in the wake of a landmark U.S. Supreme Court ruling in 2018, DraftKings has incurred greater costs for promotion and customer acquisition. The company forecasts sales and marketing expense of $200 million to $210 million in the third quarter.
The operating environment of 2020 is also highly unusual, the company pointed out, given the drought of sports in the second quarter, followed by an avalanche of action in the third quarter. “The unique sports calendar, with overlapping seasons for all four major U.S. 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,” the filing said. (“Handle” refers to the total amount of money being wagered through the company.)
While the company does not plan to routinely report on handle data as a routine metric, it said it would offer guidance due to the unusual factors in 2020. The overall handle is expected to grow 460% in the quarter compared to the same quarter a year ago, with a 110% increase in New Jersey, the first state to legalize betting as a result of the Supreme Court decision.
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