Shares in online bookmaker Pointsbet Holdings Ltd (ASX: PBH) finished the day 6.49% lower yesterday.
Still, long-term holders of the company have been handsomely rewarded. Pointsbet shares have returned 105% over the past year and a huge 519% since listing on the ASX back in 2019.
PBH share price
Why Pointsbet shares have fallen recently
On 12 June, Pointsbet released 22 million shares from escrow, increasing the paper gains of its owners by over $300 million based on the current share price at the time of $13.60.
What does escrow mean?
In this case, escrowed shares are held by early investors and directors, but they’re not allowed to sell them for a set amount of time.
After this period, holders can choose to sell their holdings, which can sometimes have a negative impact on the share price. Although in Pointsbet’s case, one might question why one would sell given the recent strength in its share price.
Even though the number of tradable shares will increase by 12%, this will unlikely have a dilutive effect on existing shareholders as the shares had already been issued some years ago.
On the topic of dilution, in 2019, Pointsbet entered into an agreement with Penn National Gaming Inc (NASDAQ: PENN) for digital sports betting and gaming services in the US.
As part of the agreement, Penn was issued just over 10 million options exercisable at $4.75 on or before September 2021.
This will provide Pointsbet with just under $50 million in cash if all options are converted. This is great from a cash flow standpoint, but it will have a dilutive effect on existing shareholders, so more volatility can be expected in the coming months.
Time to buy Pointsbet shares?
Pointsbet seems to be executing well on its growth strategy, especially its operations in the US which could prove to be an extremely lucrative market.
Digital wagering is still in the process of becoming legal in some US states. Without any knowledge of US betting regulation, I do find it hard to quantify some of this regulatory risk.
It may also be worth considering Pointsbet’s valuation, which commands a market cap of just under $2.5 billion.
With FY21 revenue estimated to be $200 million, it definitely seems like the market has priced in some optimistic growth assumptions.
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