Shares of DraftKings Inc. (DKNG) plunged almost 10% in intraday trading on June 15, following accusations from research firm, Hindenburg Research, claiming the company has ties to black-market activities. DKNG shares closed at $48.51, ending the day down 4.2%.
DraftKings designs and develops online fantasy sports applications for daily play options across multiple fantasy sports competitions. (See DraftKings stock analysis on TipRanks)
The company went public on April 24, 2020, via a three-way merger between DraftKings, its SPAC sponsor, and SBTech, a Bulgaria-based gaming technology company.
Yesterday, Hindenburg Research published a report titled, “DraftKings: A $21 Billion SPAC Betting It Can Hide Its Black Market Operations.”
According to the report, DraftKings’ merger with SBTech also brings exposure to extensive dealings in black-market gaming, money laundering, and organized crime, based on their review of SEC filings and discussions with former employees.
The report claims that SBTech earns 50% of its revenue from markets where gambling is banned.
Initially, SBTech contributed around 25% of DraftKings’ total revenue and was the only segment producing positive operating income. However, as the company’s consumer business grew, SBTech’s revenue contribution shrunk to around 10% of total revenue.
Following the news, DraftKings said in a statement, “This report is written by someone who is short on DraftKings stock with an incentive to drive down the share price… 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.”
In May, DraftKings reported Q1 revenue of $312 million, surpassing analysts’ estimates of $236.19 million. The company raised its full Fiscal year 2021 revenue guidance to be in the range of $1.05 – $1.15 billion.
Recently, Morgan Stanley analyst Thomas Allen reiterated a Buy rating on the stock but lowered the price target to $58 (19.6% upside potential) from $63.
After a deep dive into the company’s financials, the analyst found its share count increased to 430 million from 350 million, with only 37 million of primary issuance. Allen noted that the company is expected to incur around $1.1 billion in SBC expense over the next 2.1 years.
The stock has a Strong Buy consensus rating based on 15 Buys and 4 Holds. The DKNG average analyst price target of $69.08 implies 42.4% upside potential to current levels. Shares have exploded 395% since going public in April 2020.
TipRanks data shows that financial blogger opinions are 85% Bullish on DKNG, compared to a sector average of 69%.
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