DraftKings, Genius Sports Among Worst Stock-Based Compensation Offenders

Posted on: March 28, 2022, 01:21h. 

Last updated on: March 22, 2023, 08:46h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Genius Sports (NYSE:GENI) and DraftKings (NASDAQ:DKNG) are the worst offenders in terms of equity-based compensation as a percentage of 2021 gross profits.

stock-based compensation
Inside DraftKings’ Boston office. The company and Genius Sports dole out large amounts of stock-based compensation. (Image: Wall Street Journal)

That’s according to a list constructed by Twitter user JiggyCapital. By his data, sports betting data provider Genius’s stock-based compensation as a percentage of 2021 gross profits was an astounding 789%. That’s while the tally for DraftKings was 136%. The companies’ stock-based pay as a percentage of 2021 operating income was -89% and -44%, respectively.

Stock-based compensation, also known as equity-based or share-based compensation, is common among publicly traded companies. It is frequently used by young, unprofitable growth companies that may want to conserve capital directed toward employees’ cash salaries. In 2021, the median salary for a DraftKings staffer was $102,098, while CEO Jason Robins garnered 137 times that amount.

Broadly speaking, the investment community doesn’t decry stock-based compensation, particularly among youthful tech companies, because the fight to attract and retain talent is ultra-competitive. However, there times when this way of rewarding employees draws scrutiny.

Why It Matters for DraftKings, Genius

While lavishing stock upon workers conserves cash, the strategy still has balance sheet implications because the expense is added back to derive a company’s cash flow. By adding it back, a company’s shares outstanding count increases.

Challenges and issues with equity remuneration include: Dilutes the ownership of existing shareholders (by increasing the number of shares outstanding) (and it) may not be useful for recruiting or retaining employees if the share price is decreasing,” according to the Corporate Finance Institute.

In the cases of DraftKings and Genius Sports, both of which came to market via mergers with special purpose acquisition companies (SPACs), share prices are in free fall. Over the past year, the online sportsbook operator lost 71.38 percent of its value, while Genius shares are lower by 70.68 percent.

At a staggering 20,742 percent, Genius is also the worst offender in terms of stock compensation as a percentage of earnings before interest, taxes, depreciation and amortization (EBITDA), notes JiggyCapital. DraftKings isn’t among the top 25 on that dubious list.

Margins Matter, Too

With analysts and investors increasingly scrutinizing time lines to profitability for sports betting stocks, expanding shares outstanding counts don’t help matters when it comes to per share earnings.

Some companies in this group are also dealing with margin issues. For example, DraftKings’ gross margins declined 42.9% from 2019 through 2021. On the other hand, Genius Sports’ gross margins jumped almost 24% over that period — good for one of the best increases.

DraftKings and Genius are the only gaming equities to appear on any of the lists mentioned here.