Are Investors Overreacting To DraftKings Report By Short-Seller?

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DraftKings stock dropped 5% Tuesday morning as the sportsbook operator was targeted by an explosive report from Hindenburg Research, an activist company involved in short selling.

In a lengthy report and accompanying Twitter thread, Hindenburg alleged DraftKings had “systematically skirted the law” and tried to hide its “black market operations from the investing public.”

What was in Hindenburg’s DraftKings short report?

The report largely focused on platform provider SBTech, which DraftKings acquired as part of its process of going public.

“SBTech has a long and ongoing record of operating in black markets,” Hindenburg wrote.

“We estimate that roughly 50% of SBTech’s revenue continues to come from markets where gambling is banned.”

Shell companies

Ahead of going public, Hindenburg alleges that SBTech spun out a separate business to handle its black market business called BTI/CoreTech.

That business was run by former SBTech staffers and paid SBTech for use of its technology, Hindenburg said.

“These violations appear to be continuing to this day, all while insiders aggressively cash out amidst the market froth,” the report added.

DKNG and SBTech insiders have sold around $1.5 billion in stock since the SPAC process. SBTech founder Shalom McKenzie alone sold more than $568 million in stock.

DraftKings stock already going down

DraftKings was also under fire last week from Morgan Stanley for the level of executive compensation.

The stock is down around 37% from its highs in March, currently trading around $47.

The share price was initially down around 10% in pre-market trading Tuesday before recovering half of those losses.

What does this mean for DraftKings going forward?

Hindenburg called for a third-party audit of the SBTech business and its revenue streams.

“The US online gambling industry is in its infancy.” Hindenburg wrote “It is still in the process of proving to the public that online gaming operators can act responsibly and ethically.”

What about DKNG partners?

SBTech runs the sportsbook for the Oregon Lottery, after a lengthy due diligence process. But the report alleged SBTech made multiple “misrepresentations” to the Oregon Lottery about its black-market operations.

Could the Lottery revisit that due diligence?

Similarly, DraftKings/SBTech run sports betting in New Hampshire on behalf of the state.

DraftKings also has a host of partners across the US sports landscape who may have some questions for the company

Partners include: 

Disney also owns an approximate 6% stake in the company.

Is the Hindenburg report fair?

Hindenburg is short the stock, so of course has incentive to portray the most negative view possible.

The research firm also had relatively little to say about the core DraftKings business. It did reference a non-attributed quote about current promotional spending being unsustainable.

What did DraftKings say?

DraftKings noted the report was written by a company with an incentive to drop the stock.

A spokesperson added: “Our business combination with SBTech was completed in 2020. We conducted an in-depth review of their business practices and were pleased with the findings. We do not comment on speculations or allegations made by former SBTech employees.”

Water off a duck’s back?

Elliot Turner, the managing partner at RGA Investment Advisors, said he agreed with the thrust of the short report.

However he suggested it might be immaterial to the company moving forward.

“In my view, all that matters is if they successfully pull off the migration to SBTech’s technology with minimal customer friction,” Turner said. 

“As far as the average shareholder is concerned, all’s well that ends well.”

DraftKings is planning to migrate from Kambi onto SBTech technology by the end of Q3.

That said, it has had teething issues in New Hampshire, the first state it tried to move.