DraftKings Sags as Morgan Stanley Trims Price Target, Questions Stock-Based Compensation

DraftKings (NASDAQ:DKNG) stock is trading lower Wednesday after Morgan Stanley cut its price target on the sportsbook operator. The investment firm expressed concern over the company’s equity-based compensation practices.

In midday trading, the shares are off about two percent, extending a decline that’s seen the once scintillating gaming equity shed almost 35 percent from its March high. In a note to clients today, Morgan Stanley analyst Thomas Allen reiterates an “overweight” rating on DraftKings but pares his price target on the name to $58 from $63. The new forecast implies upside of 22.6 percent from the June 1 close.

That reduction is prompted in part by DraftKings’ rising shares outstanding tally at the hands compensation tied to the equity.

In addition, DKNG has recorded $483 million of stock-based comp over the past year, and there is $1.1 billion in stock-based comp that DKNG expects to expense over the next 2.1 years,” said Allen.

The analyst says the gaming company’s shares outstanding count is up to 430 million from 350 million, with just 37 million shares of that attributable to primary issuance. Although it recently hiked its 2021 revenue guidance, DraftKings isn’t yet profitable. More shares floating around the market can drag on earnings per share.

Surprising Increase in DraftKings Stock

Morgan Stanley’s Allen indicates the significant uptick in DraftKings’ shares outstanding by way of stock-based compensation is somewhat surprising, and it appears the number could grind higher over the next several years.

“When we initiated on DKNG in April 2020, we assumed a long-term share count of 350 million diluted shares, based on company disclosures,” said the analyst. “Prior to this analysis, we had forecast 447 million shares in 2025 (28 percent higher). We now model a 465 million 2025 share count, adding in another (net settled) vested LTIP program and higher ongoing equity comp.”

Add to that, the gaming operator sold 20.8 million shares of stock in a secondary offering last October, bringing more new equity supply to market.

Not All Bad News

Stock compensation is common among US companies, and the practice is frequently deployed by emerging growth companies, of which DraftKings is one.

It’s advantageous for employers because it limits traditional salary expenses while serving as a selling point to attract and retain talent.

As for DraftKings, there are still some positives for investors to ponder. As Allen, the Morgan Stanley analyst points out, the compelling stock remains an attractive long-term growth story, with enviable customer acquisition advantages relative to competitors.