Come at the King: No one involved in the sector would have been surprised by much that was in the Hindenburg short-selling attack yesterday on DraftKings. Allegations around black market activity and illicit operations at the SBTech B2B arm had an immediate impact with DraftKings suffering a 10% fall in pre-open trading. But despite the wide-ranging allegations, Hindenburg might have hoped that fall would have been more dramatic. Indeed, at market close the falls were restricted to just over 4%.
China crisis: Analysts at Truist said the limited reliance on SBTech’s B2B revenues (target of 4% at maturity according to a Mar21 presentation, circa 8.6% in FY22) and the historic nature of the allegations means the harm to DraftKings is limited to its reputation market sentiment. (It is maybe a moot point that the de minimis nature of SBTech’s revenues wasn’t the message at the time of the merger). The overhanging issue largely comes down to how much SBTech takes from China in particular, under reseller agreements, and how much that might affect DraftKings licensing prospects.
“Short of DraftKings knowingly profiting from illegal black markets (which we view as highly unlikely), we don’t see a real risk of regulators moving to ban DraftKings,” said Truist.
Can of worms: Jefferies analysts suggested regulators in states such as New Jersey and Pennsylvania might “feel compelled” to examine exposure to grey markets “more closely going forward”. “This could have an impact on the value of our TAM if a change in the timing of market activation were to become longer, not just for DraftKings but for all prospective operators.”
Fall-back options: Credit Suisse pointed out that SBTech’s value on DraftKings was its technology rather than the legacy B2B business. “If SBTech revenue were to go away entirely, we think there would be minimal impact on the DraftKings stock,” they added. Notably, CS pointed out that DraftKings was still operating on the Kambi platform and should there be any issues with SBTech it would “not necessarily interfere with betting operations today.” However, it might be said that an admittance of failure in moving to the SBTech platform might be more damaging to DraftKings than any allegations of previous misdeeds or of current grey market attachments.
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