Short Sellers Attack DraftKings
DraftKings has had some extremely bearish movement over the past few months. There have been problems with their earnings, the Entain deal getting scrapped, and an overall down-trend in the growth sector. DraftKings is around $30 at the time of writing this post, and down around 59% from all-time highs. You can see on the chart below, there have been some bad breaks of support, and moves below key trend-lines. It has not been a good 6 months for DraftKings’s stock. Even short-sellers are attacking DraftKings. In this post we’re going to go over the reasons why the short-sellers are shorting DraftKings stock, and whether or not their argument is valid.
The Short Sellers
Some short sellers are more famous than others. Jim Chanos is one of the main short sellers behind DraftKings and he’s pretty established to say the least. Chanos revealed that he is shorting both DraftKings and DoorDash because he believes both companies have some fundamental flaws. One huge thing to keep in mind is that Jim Chanos is the same short seller who said that Tesla is worth ZERO. We all know how explosive Tesla has been over the past few years. Chanos definitely missed a couple major points while analyzing Tesla. He said Tesla was worthless when their stock was around $68. Tesla stock went on to hit highs of $1250.
While short sellers aren’t always successful, sometimes they are, and they usually have a pretty good reason to be bearish. Looking at DraftKings, Chanos is bearish because of the high marketing costs right now and said, “DraftKings has a valuation right now of 30 times runway revenue,” he told CNBC. “You can believe in sports betting ... but this business model is flawed.” You can tell he is not a fan of DraftKings’ fundamentals or platform, “If you quadrupled DraftKings’ revenue and gross profit ... and take their marketing spending, which is currently over 100% of revenue, to 10% of revenue, which is their target, and you keep overhead at today’s level ... DraftKings would still be losing $200 million a quarter.” DraftKings CEO, Jason Robins, struck back and said Chanos’s math “makes no sense”. Robins hit back even harder saying on Twitter, “We did $644m in revenue last year (2020) and 2021 consensus is $1.263B. Almost 100% y/y growth.” A 100% jump in revenue, especially in one year, is AMAZING. That type of growth is rarely seen from larger companies like DraftKings. Do we expect this growth to slow down? Maybe eventually. But as of right now sports-betting is only legal in certain states. Using the map below, we can see only a handful of states have legalized sports-betting. Once more states become legal, it will bring in so many more customers, especially those larger states like California and Texas.
Are We Buying DraftKings Stock?
Yes, we are buying DraftKings stock. We plan on holding the stock for the long-term, and recommend only buying if you can hold your shares for the long-term. Jim Chanos does make some good points and it’s important to always be objective while analyzing companies. People often ask why DraftKings is spending so much money on marketing. Interest rates are really low right now. It makes a lot of sense to take advantage of this low interest rate environment and to spend money on marketing and establishing the DraftKings brand as much as possible. Let’s keep in mind that DraftKings is spending the money MARKETING. This is boosting their popularity so when massive states like California legalize sports-betting, DraftKings will hopefully be on top and take most of the market share. Marketing is a huge deal in the sports-betting industry and DraftKings is spending a lot of money right now to ensure that their brand is the leader for the coming years.
We love DraftKings for the long-term. While they aren’t profitable yet, they have the potential to become insanely profitable in the future. Once more states legalize, and DraftKings gets a return on their marketing spend it will be game on for them. A lot of growth stocks aren’t profitable now and some companies like Tesla took years before they finally turned a profit. Tesla was also experiencing pull-backs when it was in its own growth phase like we are seeing with DraftKings right now. We don’t want to come off as overly biased towards DraftKings but as a company they have a lot of room to grow. Michael Jordan, and Tom Brady’s wife, Gisele Bündchen, are on the DraftKings board. DraftKings even made a deal with Tom Brady and Autograph and even have a potential deal lined up with Disney’s ESPN, along with all of the other amazing deals with sports leagues. Trade at your own risk. This is not stock advice and should be treated as such. Any actions you make in the market are at your own risk, we are not professionals.