DraftKings Defended by Analysts, Wood’s ARK Invest Following Hindenburg Short Report

Posted on: June 16, 2021, 09:37h. 

Last updated on: June 16, 2021, 10:39h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

A day after slumping following publication of a bearish report by Hindenburg Research, DraftKings stock (NASDAQ:DKNG) is rebounding modestly Wednesday. Several analysts are defending the sportsbook operator, along with the support of a well-known investor.

DraftKings stock
ARK Investor founder Cathie Wood, seen above. Her firm bought more DraftKings stock following release of a bearish research report. (Image: Business Insider)

On Tuesday, shares of DraftKings finished lower by 4.1 percent — though that was well above the lows of the day — after short seller Hindenburg issued a scathing report. It accused SBTech, a unit of the sports wagering company, of operating in markets where sports betting is prohibited, money laundering, and having links to organized crime.

Hindenburg also points out SBTech founder Shalom Meckenzie is leading a wave of selling by DraftKings insiders, recently dumping $567.8 million worth of the stock.

Several weeks ago, Meckenzie transferred 19 million shares to a trust for his spouse and kids, paving the way for them to dispose of ~$1 billion in stock without the same reporting requirements he would be subject to,” according to the research firm.

In addition to allegations that SBTech operates in China, Thailand, and Vietnam — all countries where sports betting is barred — and that the company has ties to a triad crime boss, Hindenburg notes DraftKings’ recent market value is in excess of rivals FanDuel, Supergroup, and Wynn Interactive combined. The research firm calls that an “extremely rich valuation” when considering the company may not be profitable until 2025.

Wood’s ARK Buys the Dip in DraftKings Stock

While Hindenburg said it’s short DraftKings stock, other investors used Tuesday’s retreat to add to long positions in the gaming name.

Cathie Wood’s ARK Investment Management bought $42.2 million worth of the name yesterday, or 870,299 shares. The exchange traded funds (ETF) issuer allocated about 688,700 of those shares to the ARK Innovation ETF (NYSEARCA:ARKK) — its biggest fund. The remainder went to the ARK Next Generation Internet ETF (NYSEARCA:ARKW).

New York-based ARK has been gobbling up DraftKings stock for months, and is among the largest institutional holders of the name. The stock is the 17th-largest holding in the famed ARK fund. The ARK Fintech Innovation ETF (NYSEARCA:ARKF) also holds DraftKings, but Tuesday’s buying activity in the name wasn’t directed to that fund.

This isn’t the first time Wood’s firm used a decline in a stock prompted by short sellers to add to a position. In April, the fund issuer defended mobile games platform provider Skillz (NYSE:SKLZ) following a spate of bearish research, using weakness in that name to buy the shares.

Analysts Chime in, Too

As Credit Suisse did yesterday, several research firms are out today in defense of DraftKings. Jefferies analyst David Katz said the crucial matter is whether or not DraftKings adequately disclosed SBTech’s black/gray market exposure and whether that exposure remains today. While noting the matter is unresolved and raises “a series of key questions and issues worth noting,” the analyst keeps a “buy” rating and $75 price target on the stock.

Truist analyst Barry Jonas said it’s unlikely the US and other regulators will deny DraftKings gaming licenses as a result of the controversy, and that SBTech isn’t a meaningful contributor to the parent company’s revenue. He keeps a “hold” rating and $54 forecast on the stock.

Susquehanna analyst Joseph Stauff said the SBTech revelation isn’t surprising, because nearly all European and UK sports betting firms operate in black/gray markets. He adds that if there are risks with DraftKings, they are launch speeds and the company’s cash burn rate. The analyst has a “positive” rating on the shares with a $75 estimate.

Morgan Stanley’s Thomas Allen says unregulated international markets probably account for just eight percent of DraftKings revenue, and that SBTech will decline to five percent of the company’s sales in 2025. He adds that if DraftKings sees fit to dispose of SBTech’s legacy assets, it won’t affect overall forecasts. Allen rates the stock “overweight,” with a $58 target.