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Wall Street Largely Brushes Off Long-Term Implications Of Hindenburg Short Seller Report On DraftKings

Analysts question whether SBTech's alleged black-market activities necessitate a sell-off

Matt Rybaltowski by Matt Rybaltowski
June 16, 2021
in Industry
DK Proxy Settlement

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DraftKings shares continued to rebound Wednesday one day after a well-known short seller issued a report alleging SBTech’s purported black-market dealings overseas.

Shares in DraftKings plunged nearly 11% in pre-market trading Tuesday following a report by Hindenburg Research that accused SBTech of concealing its black-market activities through a front company established in 2018. DraftKings’ shares fell below $45 on the news, sinking to near one-month lows, before rebounding on Wednesday morning to above $50 a share. At Wednesday’s high, DraftKings’ recovered all of the losses from Tuesday’s sell-off.

The report triggered a flurry of activity in DraftKings on Tuesday with trading volume of more than 87 million shares, a five-fold increase from the previous day’s session. Two actively managed funds from prominent investor Cathie Wood’s Ark ETF acquired a combined 870,299 shares during Tuesday’s session, worth more than $42.2 million.

DraftKings’ shares are down about 35% since reaching $74 a share in mid March.

Response from DraftKings

DraftKings, a Boston-headquartered sports betting and fantasy sports operator, completed a tri merger with SBTech and Diamond Eagle Acquisition Corp. in April 2020. Years earlier, the apparent front company, BTi/CoreTech, acted as a customer of SBTech possibly to create a layer of “legal separation between SBTech and its black market end customers,” a former SBTech employee told the authors of the Hindenburg report.

Established in 2007, SBTech is a turnkey supplier of business-to-business (B2B) services in the sports betting and iGaming industries. SBTech, which has received licensure in numerous U.S. states and a handful of nations abroad, also provides a suite of risk-management and trading solutions, as well as in-game betting products.

After extensive research, Hindenburg disclosed Tuesday that it has taken a short position in DraftKings.

“This report is written by someone who is short on DraftKings stock with an incentive to drive down the share price,” DraftKings said in a statement. “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.Β  We do not comment on speculation or allegations made by former SBTech employees.”

"Research firm alleges the company’s gambling-technology unit SBTech operates in countries where gambling is banned, an allegation DraftKings denies"

DraftKings Shares Fall After Hindenburg Unveils Short Positionhttps://t.co/sAIuOX82dN via @WSJ

— Alfonso Straffon πŸ‡¨πŸ‡·πŸ‡ΊπŸ‡ΈπŸ‡²πŸ‡½ (@astraffon) June 15, 2021

The allegations

Weeks before the Supreme Court’s PASPA decision, SBTech announced that Tom Light, then Senior Vice-President of Business Development with the company, planned to leave the group to start a new gambling and blockchain venture. Days later, the new entity was renamed BTi, Hindenburg reported, citing Bulgarian and Malta corporate records. Light is deeply connected with Asian clients, according to Hindenburg, while one former SBTech employee credited his ability to “network with black and grey market operators,” for helping broaden the company’s international scope over a four-year period through 2018.

β€œBefore SBTech joined with DraftKings, they split the grey market/unregulated…they [Bti] are a separate company marketing their white label solution to Middle East, South America, mostly China and Malaysia. Their technology provider is SBTech. Because SBTech is now on NASDAQ they don’t want Asia or the grey market to give it a bad influence. They want to be clean.”

–Hindenburg Research, June 15, 2021 report

Nevertheless, numerous sports betting suppliers conduct business in grey markets throughout Europe and Asia, many of which SBTech views as main competitors. A grey market is largely defined as one where sports betting is unregulated, but not legal. Another gambling provider, Playtech, has gained a reputation for deriving the bulk of its revenues from countries that operate in the grey marketplace, the Jerusalem Post wrote in 2019. Playtech, one of the world’s largest sports betting suppliers, is founded by Israeli businessman Teddy Saggi.

In 2020, an unnamed Asian customer made up about 52% of SBTech’s revenue, Hindenburg reported, citing an SEC filing. A second former SBTech employee claims that roughly 90% of the company’s revenues come from activities on the grey or black market.

BTi/CoreTech maintains an office in Sofia, several miles from SBTech headquarters in the Bulgarian capital. After Light moved to BTi/CoreTech, about 50 SBTech employees were transferred to the new firm, Hindenburg alleges. DraftKings did not address the specific allegation in Tuesday’s statement.

Single-digit revenue contributions

Despite the concerns raised by Hindenburg, top Wall Street analysts question whether SBTech’s revenues are material to DraftKings’ bottom line. Ahead of its public debut in 2020, DraftKings initially projected SBTech’s B2B operations to amount to roughly 11% of DraftKings’ target revenues at maturity. The company then lowered the projected contribution levels to 4% of its targeted revenues in March, during its 2021 Investor Day presentation.

While some investors have asked regulators to inspect the reseller business in China more closely, the grey market activity appears to have little impact on DraftKings’ licensing prospects, Truist Securities analyst Barry Jonas wrote in a June 15 analyst note. After all, a host of major European companies with unregulated businesses in Asia are currently licensed in various U.S. states, he added.

“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,” Jonas wrote in the note.

Jim Cramer, host of CNBC’s Mad Money, also downplayed the allegations levied by Hindenburg. Since SBTech comprises less than 10% of DraftKings’ company, the issues raised in the report are not a “reason to sell,” shares in DraftKings, Cramer said.

.@jimcramer says $DKNG's future looks solid, adding that the issues Hindenburg raised regarding SBTech are 'not a reason to sell.'https://t.co/xnUtE3paJJ

— TheStreet (@TheStreet) June 16, 2021

In the meantime, DraftKings continues to prepare for its migration to an in-house betting engine powered by SBTech. DraftKings CEO Jason Robins noted during last month’s earnings call that the company is on track to complete the transition by some point in the third quarter of 2021.

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Matt Rybaltowski

Matt Rybaltowski

Matt is a veteran writer with a specific focus on the emerging sports gambling market. During Matt's two decade career in journalism, he has written for the New York Times, Forbes, The Guardian, Reuters and CBSSports.com among others. In his spare time, Matt is an avid reader, a weekend tennis player and a frequent embarrassment to the sport of running. Contact Matt at matt@usbets.com.

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