Over the past month, shares of DraftKings (DKNG) have taken investors on a wild ride. Actually, this is a stock that has proven to be ultra-volatile throughout the year.
Shares of DKNG stock opened the year at around the $45 level. Amid the earlier meme stock rally we saw at the beginning of this year, shares of DKNG stock surged to nearly $75 per share on heavy momentum. In fact, this momentum carried on longer than with other high-profile meme stock plays. (See DraftKings stock analysis on TipRanks)
However, since March, shares declined back down to as low as $40 per share along with other high-growth names. A number of factors, including concerns about inflation and rising bond yields, took most growth stocks down during this time frame. However, it’s clear some level of short-selling was attributed to this decline. With a short volume ratio of 24% right now, this stock is one of the most heavily-shorted in the market today.
Thus, we have an intriguing setup. On the one hand, some rather unfavorable information was released on DKNG stock which incited more short-selling pressure of late. On the other hand, the retail investing army is looking for any excuse to buy into a good old-fashioned short squeeze opportunity.
Will this stock squeeze, or will retail traders get squeezed by short-sellers?
First, let’s dive into why DraftKings has seen so much pressure from short-sellers of late.
Short Report Highlights DraftKings’ Potential Ties to Black Market
It’s important to note that short-sellers provide an important role in the functioning of financial markets. By exposing everything from inaccuracies to wrongdoing and outright corporate malfeasance, short-sellers are the yin (short-end) to the otherwise more popular yang (long-end) of the markets.
Thus, short reports can be useful to investors seeking transparency on stocks they own, or stocks they are looking at. Investors need to make calculated decisions with respect to all information (good and bad) on any stock. And more information makes for a more accurately-priced equity market.
In the case of DraftKings, a short report from Hindenburg certainly highlights some interesting potential black market ties. Among the allegations made in this report are the following:
- “The company went public in a 3-way merger between (1) DraftKings, (2) its SPAC sponsor, and (3) a Bulgaria-based gaming technology company called SBTech.”
- “SBTech accounted for ~25% of total revenue at the SPAC consummation and was the only positive contributor to operating income, providing both financial stability and technology to the deal.”
- “Unbeknownst to investors, DraftKings’ merger with SBTech also brings exposure to extensive dealings in black-market gaming, money laundering and organized crime.”
- “Based on conversations with multiple former employees, a review of SEC & international filings, and inspection of back-end infrastructure at illicit international gaming websites, we show that SBTech has a long and ongoing record of operating in black markets.”
- “We estimate that roughly 50% of SBTech’s revenue continues to come from markets where gambling is banned, based on an analysis of DraftKings’ SEC filings, conversations with former employees, and supporting documents.”
What Analysts Are Saying About DKNG Stock
According to TipRanks’ analyst rating consensus, DKNG stock comes in as a Strong Buy. Out of 19 analyst ratings, there are 14 Buy recommendations and 4 Hold recommendations.
As for price targets, the average analyst DraftKings price target is $69.08. Analyst price targets range from a low of $42.50 per share to a high of $105.00 per share.
What Should Investors Do from Here?
Short-sellers can get it wrong. Perhaps nothing even remotely nefarious is currently going on with DraftKings.
The strong response from investors denouncing this short report as “FUD” or “fake news” certainly are entitled to their opinions. And they could be right.
However, as with any piece of new information, investors should do their own independent research on the topic. The allegations highlighted in this short report certainly don’t seem to be downright unrefutable. Also, DraftKing’s acquisition of SBTech has been noted by analysts as being driven more by SBTech’s platform than the revenue it provided DraftKings as a result of the deal.
At the same time, there may indeed be nothing to see here. The fact that DKNG stock dropped 10% on this news could have created a good buying opportunity for those who did their homework and realized that this is noise.
On the other hand, those who may be more concerned with the allegations and take them more seriously may conclude this isn’t the company for them.
This decision comes down to the individual risk tolerance level of the individual investor, and whether they think this stock fits in their portfolio. There’s really no right or wrong answer with respect to DKNG stock right now.
That said, it’s clear some re-pricing is likely in the coming days, and more volatility can be expected over the near-term.
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.
