The David vs. Goliath battle that’s currently underway in the market right now is intriguing to watch. Indeed, any stock that comes under scrutiny by short-sellers seems to get retailer investors pumped. That's what appears to be the case with DraftKings (DKNG) right now.
A high-profile short report issued by Hindenburg Research on DraftKings has not really affected DKNG stock, all things considered. Indeed, following a sharp double-digit decline on June 15, the day the short report was released, shares of this online betting platform have since rallied substantially. Currently, DKNG stock is holding its own, and appears to be on solid footing. (See DraftKings stock charts on TipRanks)
Any battleground stock into which retail investors continue to pile en masse is worth watching right now. While we have seen a relative stabilization of DKNG stock recently, it’s worth noting that volatility could pick up at any moment.
Let’s dive into what the allegations are, and why retail investors are jumping to DraftKings’ support right now.
Hindenburg’s Allegations Highlight Potential Black Market Dealings for DKNG Stock
Any sort of nefarious, black market activity concerning a stock is worrisome. According to Hindenburg’s short report, the company’s three-way SPAC deal is of concern.
The SPAC merger between Diamond Acquisition and DraftKings included a third party, SBTech. While DraftKings was the ultimate focal point for Diamond Acquisition, it’s the SBTech piece that has garnered attention from Hindenburg.
The short-selling firm alleges that roughly half of SBTech’s revenues were generated via black market activities. Hindenburg notes that SBTech has previous involvement with “plenty of mobs” and other unseemly actors. For retail investors who may have heard about this for the first time in mid-June, such surprising news may have rightly initiated an extremely bearish response.
However, it appears retail investors have continued to rally around this stock. Indeed, some retail investors seem set to make it their mission to crush Hindenburg as a way of preventing “market manipulation.”
While short sellers tend to be good faith actors who attempt to help along the price discovery for stocks more quickly than would otherwise be possible, disdain for short sellers is near an all-time high right now. In face, some investors have accused short sellers of cooking up the Hindenburg report in order to reduce the share price.
Let’s take a look at what retail investors are hanging their hats on with DraftKings.
DraftKings Has an Attractive Growth Model
Companies like DraftKings that generate triple-digit revenue growth actually fit into the portfolios of many retail hyper-growth investors right now. Accordingly, the degree to which investors may be willing to actively turn a blind eye to some serious concerns has been tested with this short report. In the case of DraftKings, it appears investors like this stock enough to do so.
Bulls on DraftKings will note that the vast majority of revenue generated by DKNG stock comes from the DraftKings platform. In fact, the SBTech deal was orchestrated as a way for DraftKings to improve its infrastructure.
The three-way deal has been thought of by many investors as one between a SPAC (Diamond Acquisition), DraftKings (the online sports betting platform), and SBTech (a back-end infrastructure/software provider with the potential to improve DraftKings’ platform). Currently, DraftKings brings in approximately 75% of the total revenues of the combined partnership. Accordingly, expectations are that DraftKings could simply choose to forego any of SBTech’s revenue, focus on its existing platform, and still see amazing growth. In fact, the downside to such a move would be very limited.
Accordingly, it appears the market has largely blown off this short report. With shares now trading near pre-short report levels, investors are banking on DraftKings’ management team cleaning up any loose ends as a result of the merger.
What Analysts Are Saying About DKNG Stock
According to TipRanks’ analyst rating consensus, DKNG stock comes in as a Strong Buy. Out of 20 analyst ratings, there are 15 Buy recommendations and 5 Hold recommendations.
As for price targets, the average DraftKings price target is $68.13. Analyst price targets range from a low of $42.50 per share to a high of $105.00 per share.
The market appears to be pricing DKNG stock appropriately right now. This short report certainly raises some red flags of which investors ought to be wary. At the same time, DraftKings has the means to turn off revenue streams from unwieldly customers. It could also choose to simply focus on the company’s primary DraftKings platform. Either of those options could provide a remedy for these allegations.
Barring any sort of investigation into DKNG stock, this is a company which is likely to remain hot for some time. Of course, valuation concerns could take these hyper-growth plays on a volatile ride.
Accordingly, investors should always practice prudent risk management in constructing portfolios, acting according to one’s risk tolerance level and sizing positions accordingly.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities