Short reports are a long investor’s nemesis, but the intrigue is fascinating for the casual observer. While a short report has a clear incentive to see the price drop, sometimes they can also shine a light on a business’ flimsy value proposition, or in the latest case to grab the headlines, even potentially uncover criminal activity.

Earlier this week, short-seller Hindenburg Research alleged that via SB Tech, the Bulgaria-based gaming technology company DraftKings (DKNG) merged with last year – the online sports-betting platform has exposure to illegal market activities. The report claimed that 50% of SBTech’s revenue is generated from markets where there is a ban on gambling.

DKNG has released a statement denying any nefarious activities, but that wasn’t enough to halt the shares’ mid-week slide. However, was it just a knee-jerk reaction by the market or is the DKNG story – one which hinges on the increasing adoption of online gambling – about to be seriously derailed?

Jefferies analyst David Katz thinks it is “besides the point” whether SBTech has had some “gray market exposure” in the past, claiming “this aspect is inherent in numerous global markets.”

Instead, there are other “key issues” which need addressing: “1) What was the full extent of SBTech's involvement in various markets, 2) That DKNG fully vetted SBTech's businesses and individuals, and 3) Whether DKNG disclosed its involvement in its licensing processes.”

Another element to consider is whether DKNG has done enough to distance itself from any current activity in illegal markets. In the 6/15 press release, the company had indicated it had done so. Katz thinks the revelation’s outcome could range from “no impact to fines to licensure impact.”

Katz also thinks it is important to know whether bringing SBTech under the fold was based on “owning and developing the technology, rather than any revenues or profits generated outside the US.” If based on the former, as the 5-star analyst believes, then it should “mitigate the risks to some degree.”

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To make any call regarding the shares in the near-term, however, Katz says there is not yet enough information available, and until more is known about the affair, he refrains from reacting aggressively “one way or the other.” Longer term, however, Katz remains “comfortable with DKNG's positioning and capabilities.”

As such, Katz sticks with a Buy rating and $75 price target for DKNG stock. This target suggests the stock will be changing hands for a 52% premium a year from now. (To watch Katz’ track record, click here)

Most of Katz’ colleagues also remain in DKNG’s corner. Based on 16 Buys vs. 4 Holds, the stock has a Strong Buy consensus rating, while the $69.38 average price target implies gains of 42% could be in the cards over the next 12 months. (See DKNG stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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