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DraftKings is still a risky stock, this investor says

The stock may be well off its highs of just a few months ago, but there are just too many unknowns about both DraftKings (DraftKings Stock Quote, Chart, News, Analysts, Financials NASDAQ:DKNG) and the nascent online sports betting space, according to Christine Poole, managing director at GlobeInvest Capital Management, who says the recent short-seller attack adds a further question mark to the story.

Digital sports and gaming company DraftKings was in the crosshairs of the latest report from Hindenburg Research which claims that Bulgarian tech firm SBTech which merged with DraftKings as part of its public listing in April 2020 has ongoing business in black market gambling, including illegal sports betting in countries such as Vietnam, Thailand and Iran.

“Unbeknownst to investors, DraftKings’ merger with SBTech also brings exposure to extensive dealings in black-market gaming, money laundering and organized crime,” the Hindenburg report says. “As one former employee told us, DraftKings’ subsidiary SBTech has ‘sold to plenty of mobs,’ a sharp contrast to the clean image of DraftKings’ brand-conscious partners, including the NFL, NBA, NASCAR, UFC and PGA.”

DraftKings’ share price dropped four per cent on Tuesday with the release of the report from Hindenburg, which has said it has a short position on DKNG.

So far, DraftKings has shot back to say that its business combination with SBTech was “completed in 2020.” “We conducted a thorough review of their business practices and we were comfortable with the findings,” said DraftKings in a statement.

DraftKings had a huge run-up over 2020 and early 2021, going from $11 to over $70 in the span of 12 months. The stock has dropped in recent months, however, and has been trading in the high-$40 range.

Poole said the sports betting market may be huge but the investment opportunities come with a lot of risk.

“I know the stock has pulled back. There is the short sell report saying DraftKings is operating in areas where online gambling is illegal,” Poole said, speaking on BNN Bloomberg on Wednesday.

“The company has come back to say, no, they don’t believe so. But I think this short seller, he has done well with some of his prior calls, so the market is paying some attention to this,” said Poole.

“I’ve looked at [DraftKings] because it’s potentially a very attractive market and DraftKings is kind of one of the leading players in that market,” Poole said. “The stock had shot up quite a bit last year when all those momentum stocks were doing well, [but] I just find it very difficult to model in terms of the market size, what it’s going to look like in let’s say five years and there’s going to be a lot more competition because everyone is going to want to get into this attractive space.”

DraftKings is certainly a growing business. Its most recent quarterly report, the company’s Q1 2021, delivered in early May, showed revenue up 253 per cent year-over-year to $312 million, with management upping its revenue guidance for the year from $1.05 to $1.15 billion.

The company said business is doing well at attracting and keeping customers, increasing its monthly unique payers (MUPs) for its B2C segment by 114 per cent year-over-year and with an average of 1.5 MUPs per month over the Q1. Average revenue per user grew by 48 per cent, as well, moving to $61 million.

“We continued to make progress and remain on track with the migration to our own in-house proprietary sports betting engine, strengthened our content and technology capabilities with the acquisitions of VSiN and BlueRibbon Software, and invested in further differentiating our product offering with the upcoming rollout of social functionality in our DFS and mobile Sportsbook apps,” said co-founder and CEO Jason Robins in a press release.

The first quarter saw DraftKings launch mobile sports betting in Michigan and Virginia. And while sports betting is now legal in over two dozen states, with DraftKings’ Sportsbook available for either mobile or retail betting in 14 states. DraftKings’ daily fantasy sports offerings are available in seven countries worldwide.

This year, DraftKings became the UFC’s Official Sportsbook and Fantasy Partner in the US and Canada, giving it the ability to offer in-game promotions, activations, in-broadcast odds integrations and UFC branding across its daily fantasy and betting products.

Poole said, “For myself, I’m just on the sidelines watching right now. I have to see how this industry develops.”

“It’s not something that I would put in our clients portfolios, even though it has come off because I just think it’s safe to say the industry is quite new for me it’s hard to see what it’s necessarily going to look like in a few years time,” she said.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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