Although sports betting stocks were hot entering 2021, some of the biggest names have stumbled in recent weeks. One of those companies is DraftKings (NASDAQ:DKNG). With that in mind, legendary investor Jim Chanos revealed yesterday he is selling DKNG stock short.
What’s Happening With DKNG Stock
It hasn’t been a good week for DraftKings, which closed down more than 9% for the day. This week has seen DKNG stock embark on a steady downward trajectory, declining by more than 22% for the past five days and by more than 40% for the month.
During a recent discussion with CNBC’s Halftime Report, Chanos called DraftKings out on it business model, arguing that its valuation was too high. His primary problem with it, though, seemed to be the company’s marketing spending relative to its sales. As he noted:
“If you quadrupled DraftKings’ revenue and gross profits … and you take their marketing spend, which is currently over 100% revenue, [if] you take it to 10% revenue, which is their target and you keep the overhead at today’s level … DraftKings would still be losing $200 million a quarter or $800 million a year.”
Why It Matters
Not all the coverage DraftKings has received this season has been negative. In early October, Citi rated DNKG stock a “buy” with a price target of $66. That said, shares have fallen considerably since then and at present, are at $28 a piece, lower than TipRank’s current lowest price target of $34.
However, Chanos has a proven track record of successful short positions. The founder of asset management firm Kynikos Associates, he’s one of Wall Street’s best known short sellers, famous for shorting energy giant Enron before its iconic collapse.
InvestorPlace contributor Will Ashworth also recently noted that DKNG stock may not be in for a smooth season, citing the losses expected by analysts. While he noted that investors could still “win big” by betting on DraftKings, it may not be until late 2022 or even later that they see those gains.
What It Means
The stock market is heading into a bumpy period in general as the omicron variant continues to generate uncertainty. If you’re considering a bullish play, the sports betting sector certainly doesn’t seem to be the best bet and DraftKings should serve as a reminder why. It’s been falling for months and Chanos has helped highlight why, a likely indicator of what we can expect in the short term.
On the date of publication, Samuel O’Brient 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.
