While the underlying investment in DraftKings Inc (NASDAQ:DKNG) remains sound, there are a number of headwinds holding back share prices. The headwinds start with the stock’s valuation and end with short-seller Jim Chanos. In between are a number of issues that have combined to make a perfect storm for this stock. The key takeaway is: If you’re in this for the long-term and Draftkings was attractive at $50, it should be even more attractive at $30. In the end, this company is growing at a hyper-growth pace with multiple positive catalysts lurking in the shadows.
Short-Sellers Take A Bite Out Of DraftKings
The short-interest on DraftKings has been running high all year and is sitting above 11% now. This is due to the company’s high valuation relative to revenue and the expectation for profitability. Short-seller Jim Chanos underscored this point early in December when he revealed he had been short all year. His reason is simple, he thinks the business model is flawed and will never prove profitable even in the most aggressive growth scenarios.
Said Chanos:
"You can believe in sports betting, you can bet on football and basketball to your heart's content, but this business model is flawed."
Aiding the sentiment are a number of events that may keep share prices down in the near to mid-term. To start, the company has been working to get back into the Las Vegas gambling scene. The company had to exit Las Vegas when Nevada ruled online gambling had to be regulated. A recent report revealed the Nevada license application has been sitting on someone’s desk since 2020, which doesn’t bode well for its acceptance. A similar application put in by competitor Fanduel has been pending since March of 2021.
Compounding this issue is a ruling in Florida that will stymie growth in that arena. A Federal court ruled in favor of parimutuel operators that a compact between Florida and the Seminole tribe should be vacated. The specific sticking point was a plan to allow Florida residents to gamble using tribal servers from outside tribal lands, a plan that would effectively shut the parimutuel operators out.
And Then There Is Omicron
To make matters worse, there is the Omicron variant of COVID-19 to worry about. The rise of Omicron has cast a shadow of doubt on sports and sporting events. While the rise of the original strain spurred growth in some areas it curbed it in others and there is doubt things will happen the same way this time around. It is assumed those interested in online gaming are already doing so if they can, and that any impact from Omicron will be negative. The end result is that revenue projections and the forecast for profitability are in question as well.
Technical Outlook: DraftKings Might Be Bottoming
Shares of DraftKings might be bottoming. With shares down more than 40% from the recent highs, they are presenting an attractive exit for short-sellers, and there is still a very positive vibe for this stock on Wall Street. The Marketbeat.com consensus of 27 analysts is a 'buy,' with a price target more than 100% above the current price action. In that light, shares may move lower in the nearer term but, without some change in actual sentiment, it will only coil the spring tighter and make the rebound that much stronger. DraftKings will next report earnings at the end of February. 