(Bloomberg) — DraftKings Inc. fell the most since March on Tuesday after short seller Hindenburg Research said it was betting against the online gambling company.
Boston-based DraftKings — which went public via a reverse merger in April 2020 — plunged as much as 12% Tuesday to $44.65 after the report, its biggest drop since March 5. The stock trimmed losses to 4.5%, trading at $48.39 at 11 a.m. in New York.
Hindenburg disclosed a short position against the stock, meaning it will benefit from any drops in the shares. The short seller has recently waged other critiques against Lordstown Motors Corp. and Nikola Corp., which contributed to heavy losses on the stocks.
“This report is written by someone who is short on DraftKings stock with an incentive to drive down the share price,” the company said in a statement.
The Hindenburg report on DraftKings focused on the company’s technology platform subsidiary SBTech, as well as profits made by insiders who have cashed in on the stock’s surge from its deal announcement. DraftKings had soared nearly 400% from December 2019 when the company announced its three-way deal to go public alongside SBTech through Monday’s close.
DraftKings said it conducted a thorough review of SBTech’s business practices and that it was “comfortable with the findings” before the deal was completed in 2020.
Credit Suisse analyst Benjamin Chaiken defended DraftKings in a note, saying investors should use the stock’s drop as an opportunity ahead of potential gambling legalization in Canada and in New York. The analyst rates the stock ‘outperform’, with a price target at $85.
Broad Declines
Weakness for sports betting companies went beyond DraftKings as the Roundhill Sports Betting & iGaming exchange-traded fund (BETZ), a sports betting and iGaming ETF, dipped as much as 2.5%. Flutter Entertainment Plc., which owns DraftKings’ rival FanDuel, fell as much as 5.5% in London.
DraftKings shares have stumbled over recent months amid a dearth of top sporting events and a broader slide for high-flying companies. The company is one of a slew of startups that have gone public through mergers with special purpose acquisition companies.
The gaming company has yet to turn a profit and is not expected to post positive earnings until 2026, data compiled by Bloomberg show.
However, Wall Street analysts are broadly positive on the company with 20 rating shares a buy and eight having hold-equivalents. None rate it a sell and the average 12-month price target of $70 implies shares will rise 49% over the coming year.
Short Risks
Short sellers are increasingly facing pushback on trading platforms and social media, where retail traders publicly challenge investors who stand to profit from a company’s woes.
Trading in so-called meme stocks has remained hot since the start of the year after Reddit users rallied behind video game retailer GameStop Corp. after investors including Citron Capital’s Andrew Left and Gabriel Plotkin’s Melvin Capital announced bets against the company.
Left said the money manager covered most of its short bets against GameStop at a loss of 100% in late January and later said his firm would discontinue offering short-sell analysis.
Roughly one-tenth of DraftKings shares available for trading are currently sold short, according to data compiled by S3 Partners. That compares to a February low of 5.2%.
(Updates trading in second paragraph, adds additional detail in final four paragraphs.)
More stories like this are available on bloomberg.com
Subscribe now to stay ahead with the most trusted business news source.
©2021 Bloomberg L.P.
