Morgan Stanley Response to DraftKings’ Compensation Plan Causes Stock Dip

DraftKings’ stock suffered a significant blow yesterday, losing 35% in a matter of a few hours. When an analyst with financial giant Morgan Stanley provided his take on the sports gambling and gaming company’s status and showed concerns over its equity-based compensation plan, the stock dipped, but only for a short time. By the end of the day, it was back to its five-day high. However, the response to the analyst’s comments shows how much a simple statement can impact a stock price.

DraftKings Takes a Hit

Morgan Stanley analyst Thomas Allen provided an update on DraftKings’ performance yesterday and showed mixed feelings about its short-term activity. He asserted that the stock deserves an overweight rating, which means it should outperform the sector average going forward, but also raised a flag over how the company is providing compensation to certain employees. This latter concern is what apparently caused a rift in the trading.

Allen reduced his price target for DraftKings from $63 to $58, arguing that the company’s stock-based compensation for employees is substantial. He pointed out that over $483 million has been paid through equity options to employees over the past year and added that around $1.1 billion will be provided in a similar manner “over the next 2.1 years.” Putting more company shares on the market could hurt the earnings-per-share value, dragging DraftKings lower and Allen’s update comes as Morgan Stanley hadn’t expected to see DraftKings provide a significant portion of its compensation through stocks when it initiated coverage of the company a year ago.

Tuesday afternoon, DraftKings’ stock sat at $50.12, which was already below the five-day high of $51.23 recorded on the morning of May 28. By Wednesday morning at 10:30, the price had dropped to $48.38. However, the dip was short-lived, as the stock started to climb again and closed yesterday afternoon at $50.97, just below the recent high.

DraftKings Not Too Concerned

The use of stock-based compensation is nothing new in any business, especially those that are going through initial expansions. DraftKings has been around for a while, but has embraced the push for legalized sports gambling in the US with both hands and went public a year ago to become the first major sports gambling company on the NASDAQ exchange. It has seen its ups and downs since then, reaching as high as $71.72 on March 22 of this year. The lowest share price in the past year was recorded on July 13, 2020, when the stock hit $29.50.

Given DraftKings’ continued efforts to expand into new jurisdictions and create new alliances, as well as the beginning of a post-COVID-19 gaming industry in the US, the company will undoubtedly continue to see its stock increase. This is something analysts, including Allen, believe is inevitable, and the next couple of years are going to prove to be a valuable period for the company, as well as the entire gambling industry.