US sports betting company DraftKings (NASDAQ: DKNG) is a stock I’ve had my eye on for a while. The US is in the process of legalising sports betting and DKNG looks like it could be a good way to capitalise on the growth story.
Yesterday, DraftKings’ share price took a hit after Hindenburg Research published a scathing report on the company and said it was shorting the stock. Has this short-selling attack provided a buying opportunity for me? Or should I steer clear of the stock after this report? Let’s take a look at the investment case for DraftKings.
DraftKings stock: the bull case
Before I look at Hindenburg’s report, I want to discuss some of the reasons why I was thinking about buying DraftKings stock.
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The first is that the US sports betting market looks set for strong growth in the years ahead. Up until recently, sports betting in the US was illegal in most states. However, after a Supreme Court ruling in 2018, any state can now legalise this form of betting.
Already over 20 states have legalised it. Many more are likely to do so in the near future. This should provide tailwinds for companies that operate in the industry such as DraftKings. By 2025, US sports betting revenue is projected to hit $8bn, up from projected revenue of around $3bn this year.
The second reason is that DraftKings is generating very strong revenue growth. Over the last two years, revenue has risen from $226m to $615m. This year, Wall Street analysts expect the company to generate revenue of $1.17bn. This top-line growth indicates that the group has a lot of momentum right now.
Hindenburg’s report on DKNG
After Hindenburg’s report, I’m a little bit more apprehensive about buying DraftKings stock. In its report, entitled ‘DraftKings: A $21 Billion SPAC Betting It Can Hide Its Black Market Operations’, the short seller says:
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DraftKings’ merger with SBTech in 2020 brings “exposure to extensive dealings in black-market gaming, money laundering and organised crime.”
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Industry experts and competitors have questioned the viability of DraftKings’ model of aggressively burning cash on promotion and marketing to acquire customers.
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It believes DraftKings has “systematically skirted the law and taken elaborate steps to obfuscate its black market operations.”
It’s worth noting that DraftKings has responded to the short attack by saying it conducted a thorough review of SBTech’s business practices and was comfortable with the findings.
Still, I think a degree of caution is warranted towards DKNG stock after this report. Generally speaking, short sellers do their research.
Other risks
Moving away from the report, there are a couple of other issues that concern me about DraftKings stock. One is the valuation. Currently, the company has a market-cap of around $20bn. That means the forward-looking price-to-sales ratio is about 17. That’s high.
Another issue is that the company is still unprofitable. Last year, it posted a net loss of $844m. Finally, DraftKings is likely to face intense competition from rivals such as Penn National Gaming, FanDuel, and William Hill. This adds risk to the investment case.
DraftKings: my move now
Weighing everything up, I’m going to keep DKNG on my watchlist for now. The stock certainly looks interesting. However, the risks are a bit too high for me at present
