Hindenburg vs. DraftKings: Those Who Live in Glass Houses Shouldn’t Throw Stones

The crack team of InvestorPlace contributors has been all over the allegations made by Hindenburg Research about DraftKings’ (NASDAQ:DKNG) link to organized crime at its SBTech subsidiary. DKNG stock got knocked for a loss when the news first dropped on June 15.

Image of the DraftKings app on a smartphone screen.
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The most recent coverage of the Hindenburg saga comes from IP’s Dana Blankenhorn. Dana recommended that investors back away from the sports-betting company’s shares. 

My colleague has two major problems with DraftKings at this point. One that relates to the short sellers’ allegations, the other that doesn’t but reeks of excessive compensation. 

Before you condemn DKNG, let’s consider these two points from both sides of the argument. By the end, I hope to convince existing and would-be shareholders to reconsider abandoning the growing company. 

DKNG Stock Has a $750 Million Problem

According to my colleague, Morgan Stanley believes that the $750 million in stock-based compensation paid to DraftKings’ top five executives could do a number to DKNG stock over the remainder of 2021. 

That’s because it’s expected to expense another $1.1 billion in stock-based compensation over the next two years. 

While DKNG stock gained approximately 300% in 2020, about 10x its peer group, CEO Jason Robins was paid 26x the peer group. Worse still, the payout was the highest of any special purpose acquisition company (SPAC) that Morgan Stanley looked at for comparison.

DraftKings responded to the assertion its executives were overpaid by reminding investors that the target of $45 for its 2020 long-term incentive plan (LTIP) was considerably higher than its share price of $19 when it went public in April 2020. 

How was it to know that DKNG would bolt out of the gates as it did? 

A legitimate answer, in my opinion. Furthermore, if the stock-based compensation will hurt its share price, as Morgan Stanley claims, then the board and its executives are only harming the future value of their holdings.

LegalSportsReport.com does a good job explaining the five changes DraftKings made for its 2021 LTIP to prevent the same thing from happening in 2021. 

The Mob Rules

Hindenburg’s report suggests that the 2020 LTIP, and the $1.4 billion in stock sold by insiders since going public, was a gift to its executives to look the other way from SBTech’s questionable subsidiary, BTi/CoreTech.

Hindenburg believes DraftKings is a front for organized crime. Of course, they do. It makes it much easier to sell your short hypothesis that way.

My colleague argues that DKNG stock would have fallen on the day the report was released if not for the open-market buying by Cathie Woods-managed ARK Innovation ETF (NYSEARCA:ARKK). 

Further, he suggests that DraftKings’ valuation multiples should be much higher given its  “ill-gotten booty.” But here’s the thing. Let’s assume that 100% of SBTech’s revenue has been illegally obtained. 

In the quarter ended March 31, SBTech’s business-to-business revenue was $31.4 million, or 10.1% of its overall revenue. Annualize that over four quarters, and you get $125.6 million in sales. Annualize the $280.8 million in business-to-consumer revenue in the quarter, and you get $1.12 billion over 12 months for trailing 12-month revenue of $1.25 billion.

Based on a market capitalization of $20.3 billion, that’s a price-sales ratio of 16.2x. Take out SBTech/B2B business and you get 18.1x sales. 

Maybe I’m missing something, but from where I sit, that hardly seems like a major problem. Of course, the bigger issue would be if law enforcement determined that DraftKings insiders knowingly carried out a plan of deception with U.S. regulators and its new SPAC partners. 

Then, it’s very easy to imagine DKNG stock retreating to below $19, which started in April 2020.

In the meantime, ironically enough, U.S. regulators continue to allow short sellers like Hindenburg to say and do whatever they like with no real evidence other than information from former employees, most likely disgruntled, or they would still be working at DraftKings and/or SBTech.

Do you know what they say about people and glass houses?

Hindenburg shouldn’t throw stones.

 On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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