DraftKings (NASDAQ:DKNG) has been one of the most durably successful SPACS that has remained elevated, even as other SPACs have tanked. This speaks to the market’s confidence in the entertainment and gaming business, and in DKNG stock.
But that confidence is being put to the test today.
A new short report from Hindenburg Research claims that a portion of DraftKings business comes from black markets.
Hindenburg is a short seller with some big wins. They called the Nikola (NASDAQ:NKLA) farce, the Clover (NASDAQ:CLOV) implosion and most recently the Lordstown Motors (NASDAQ:RIDE) demise. So this allegation is worth taking a close look at.
But we don’t see any reason to freak out. We believe black market dealings are a very small and shrinking part of the business. So, the recent dip is a buying opportunity.
Long story short, DraftKings is actually two companies — the DraftKings online sports betting platform we all know and SBTech, a backend sports betting infrastructure software provider. The two merged when DraftKings went public.
Hindenburg claims that SBTech has a number of black market dealings, wherein SBTech is providing sports betting infrastructure to customers and markets where sports betting is still illegal. Based on conversations with former employees, Hindenburg estimates that 50% of SBTech’s revenues come from black market dealings.
We cannot verify if this is true. It sounds like it very well could be true.
But even so, we aren’t concerned, for three reasons.
Why DKNG Stock Will Be Fine
One, it’s a very small piece of revenues. SBTech accounts for 25% of revenues, and 50% of those revenues are estimated to be black market dealings. You’re talking about just 12.5% revenue exposure to the black market.
Two, these “black market” dealings likely won’t be black market for long. Every single month, it seems like another state or country legalizes online sports betting. We are on the fast track towards online sports betting being globally legal. Therefore, there there will be very little need for a “black market” in this industry. So, these supposed dealings, if they exist, will prove to only be temporarily illegal.
Three, this is all a sideshow. The core growth narrative here is that everyone likes to win money and compete. Laws around the world are rapidly shifting towards legalization of sports betting.
And one day, the global online sports betting market will be huge. Everyone will be placing bets on their phones with ease. It’ll be a way of life.
And the company at the center of it all is DraftKings, because they can and will rely on durable technology advantages and network effects to remain the “top dog” in online sports betting and daily fantasy sports.
The valuation of DKNG stock looks attractive after the plunge, so consider buying the dip at $40.
— Luke Lango and the InvestorPlace Research Staff
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Source: Investor Place