When short-seller firm Hindenburg Research rattled DraftKings with its report a few days ago, the focus was on allegations that DK’s SBTech subsidiary had served black markets and associated with nefarious characters when it was an independent company.
Further, DraftKings itself is benefitting from such markets through an SBTech spinoff that continues to operate in jurisdictions where online gaming is illegal, such as China, Hindenburg said.
The result of Hindenburg’s report: A percent hit to the stock that brought DraftKings down 34 percent from its 52-week high.
The report caught a lot of attention, in part because not long ago Hindenburg helped bring down Lordstown Motors stock by 80 percent on allegations the prospective manufacturer of electric trucks instead was manufacturing non-existent sale orders. Subsequently, Lordstown issued a going concern statement, and its founder-CEO and CFO resigned.
What got less attention in Hindenburg’s DraftKings report are comments that should be considered by fundamental investors:
“The market is pricing in perfect execution of a business with a stellar brand in a new market subject to intense competition and fraught with regulatory uncertainty… We think the company is standing on several landmines that will inhibit its ability to fulfill the market’s lofty expectations.
“We found that the key cited ‘advantage’ was simply DraftKings’ willingness to generate losses by spending its SPAC money on marketing and customer acquisition in order to boost its near-term numbers.
“The durability of such tactics seems questionable, as many customers seem to just chase the latest promotion. For example, BetMGM managed to capture an estimated 14 percent share of the national online sports betting market in the three months to February, largely through aggressive promotions.”
Now there are key points here, which we’ve addressed in this space before:
- All online gaming operators are losing money as they try to establish themselves in the new markets opening around the US.
- Operator boasts about market share or their market share goals are neither evidence of future profitability nor cause to believe those goals will be achieved.
- The internet is a great discounting mechanism. Bettors are likely not to be loyal to any operator but to the best deal or biggest giveaway offered at any moment. In other words, market share gained through money-losing promotion may prove to be pyrrhic.
Also as mentioned here before, our bias among online operators is in favor of big casino companies and operators focused on profitability and casino games rather than less profitable sports betting.
Big casino companies such as MGM Resorts, Caesars and Penn National have millions of gamblers in their databases that they can cross-market to their casinos, thus both saving on marketing costs and getting revenue two-fers.
Profit- and casino games-focused operators like Golden Nugget Online and Rush Street Interactive have the discipline to operate profitability after their initial market-opening expenses.
There are niche opportunities, too, such as NeoGames, which is already profitable and is locking up online lottery contracts along with joint venture partner Pollard Banknote.
Meanwhile, DraftKings might overcome the immediate hit to its stock from Hindenburg’s report. As its defenders said in response to the missive, SBTech represents just a small amount of DraftKings’ revenues, and it’s common for companies that once operated in gray or black markets to clean up their acts to enter the U.S.
Plus DraftKings, like FanDuel, has those millions of sports bettors in its databases compiled through their years of daily fantasy sports operations.
