Why DraftKings Could Be a Shot in the Arm for Beleaguered IPO Market

  • 2019 was not kind to the IPO market, but that could be set to change in the New Year.
  • DraftKings is poised to make its public market debut in 2020, and even though it’s not a traditional IPO, it could jump-start the deal-flow.
  • The legal sports betting market could balloon to as big as $150 billion.

Sports-betting platform DraftKings plans to make its public market debut in 2020, and it couldn’t be better news for an already-bustling stock market.

DraftKings recently announced a combo deal in which it will merge with both SBTech and Diamond Eagle Acquisition via a special purpose acquisition in which the combined company will trade in the stock market under a yet-to-be-revealed ticker symbol. The new company has already attracted more than $300 million in commitments from big investors. And even though DraftKings’ planned debut in the public markets in 2020 isn’t a traditional IPO, it could set the right tone for other new issues looking to come to market.

Sports Betting Is Big

In case you’ve been living under a rock, sports betting is kind of a big deal. Since becoming legal in certain U.S. states, sports betting has generated more than $1 billion in revenue and contributed more than $120 million to state taxes in the past year-and-a-half. CNBC pegs the legal sports-betting market size at $5 billion and the illegal one at $150 billion. As companies such as DraftKings and FanDuel continue to take market share away from the massive illegal sports betting arena, their balance sheets will only grow larger.

Source: Legal Sports Report

IPO Doldrums

It’s no secret that 2019 was a flop for some high-profile IPOs in the stock market. Shares of new issues including Uber and Lyft couldn’t maintain liftoff while another deal —  WeWork — never even got off the ground. Tech IPOs are severely under-performing the broader stock market in 2019, with average returns of 8% vs. more than 30% in the tech-heavy Nasdaq index, as pointed out by The Wall Street Journal. The S&P 500 is also beating IPOs.

Source: FactSet/WSJ

A common thread among the IPO flops is a lack of profitability or at least a clear path to it. What all of those IPO laggards did was offer a glimpse into the mindset of investors, who are becoming increasingly picky about the balance sheets of the companies that pursue the public markets. Credit Suisse global head of equity capital markets syndicate, Anthony Kontoleon, is quoted in the Journal as stating:

For the biggest companies that went public, investors really focused a lot more on the timeline to profitability and the quantum of current losses.

DraftKings is generating revenue hand over fist in a sports-betting market that boasts the potential to become a $150 billion segment. Now with the added muscle of SBTech and Diamond Eagle, the new company is expected to have a valuation of $3.3 billion attached along with hundreds of millions in cold hard cash. Institutional investors are already celebrating the deal, and retail investors are no doubt chomping at the bit to get a piece of the next big thing in sports betting.

For a year that will have a cloud of uncertainty hanging over it due to the 2020 elections and the unfolding of the U.S./China trade deal, it could be legal U.S. sports betting that proves to be winner.

This article was edited by Samburaj Das.

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