DraftKings, Inc., the daily fantasy sports pioneer that’s been riding the wave of U.S. sports betting growth, saw its shares drop as much as 12 percent last week after Hindenburg Research, a short-sell specialist, published a report alleging “black market” ties against SBTech, DraftKings’ platform subsidiary.
DraftKings went public in 2020 via a three-way merger with SBTech, a Bulgarian sports betting platform supplier, and the SPAC, Diamond Eagle Acquisition Corp. Acquisition of the SBTech sportsbook platform placed DraftKings in the center of the U.S. boom in sportsbooks that has intensified in the wake of the removal of the federal ban on sports betting with the 2018 repeal of the Professional and Amateur Sports Protection Act. As DraftKings has collected sportsbook partners, its stock has soared as much as 400 percent since going public.
On June 15, Hindenburg Research, a short-seller of DraftKings stock, published a report titled “DraftKings: A $21 Billion SPAC Betting It Can Hide Its Black Market Operations.” The report alleges that SBTech has done business with black-market sites in jurisdictions where sports betting is illegal, and where the sites are tied to money laundering and organized crime.
Hindenburg, which described the company as having experienced “one of the more successful deals in a recent wave of SPAC transactions marred by scandal and bad actors,” alleged that half of SBTech’s revenue comes from markets where gambling is unregulated or banned, including China and Vietnam. The report concluded, “DraftKings has systematically skirted the law and taken elaborate steps to obfuscate its black market operations.”
Hindenburg disclosed a short position against the stock, meaning it will benefit from any drops in the shares. It is the third recent short-seller attack by Hindenburg, which has waged campaigns against Lordstown Motors Corp. and Nikola Corp., both of which contributed to heavy losses on those stocks.
DraftKings was quick to point out the short-sell motive of Hindenburg. “This report is written by someone who is short on DraftKings stock with an incentive to drive down the share price,” a DraftKings spokesman said in a statement to Yahoo Finance. “Our business combination with SBTech was completed in 2020. We conducted a thorough review of their business practices and we were comfortable with the findings. We do not comment on speculation or allegations made by former SBTech employees.”
DraftKings shares were already faltering over recent months amid a dearth of top sporting events. Bloomberg reports that the company has yet to turn a profit and is not expected to post positive earnings until 2026.
However, Wall Street analysts have remained bullish on the company, with 20 rating shares a “buy.” The Hindenburg report does not appear to have changed the positive outlook of stock analysts on DraftKings.
Daniel Adam, senior analyst at Loop Capital Markets, told Yahoo Finance Live that SBTech, which Hindenburg states accounts for 25 percent of DraftKings’ total revenue, which was true just after the IPO, actually only accounts for around 10 percent today.
“If you look at the logic behind the SBTech acquisition, it never had anything to do with external customers based in Asia or elsewhere, but more to do with integrating that technology into DraftKings’ vertical tech stack, which would differentiate them from virtually every other player in the industry,” Adam wrote, adding that if any of the “black market” allegations were true, it definitely would have come to the attention of state regulators, which never happened. Adam called DraftKings’ business “very credible, and not misleading.”
“I can’t comment intelligently as to whether or not these allegations that were made relating to business dealings that occurred five and 10 years ago at SBTech are actually true, but the reality is—fast-forward to today—that that piece of the business is pretty irrelevant in the grand scheme of things for DraftKings,” Adam wrote.
Ben Chaiken of Credit Suisse, an investment bank that has an “outperform” rating on DraftKings stock, issued a research note the day after the report that said basically the same thing. “Our view is that SBTech was purchased by DKNG for its tech platform (which DKNG plans to vertically integrate) rather than existing revenue stream,” the report said. “Said another way, if SBTech revenue were to go away entirely, we think there would be minimal impact on the DKNG stock.”
Barry Jonas of Truist issued a note saying that many of Hindenburg’s allegations had been investigated by Oregon regulators who found the company suitable for licensing.
The Hindenburg report called for an independent audit of DKNG’s revenue streams. Law firm Bernstein Liebhard LLP, which specializes in class-action lawsuits on behalf of shareholders, announced it is investigating DraftKings for potential violations of securities law.
