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Disclaimer: This is based on what I've researched and to the best of my ability. Do your own DD. Obligatory this is not an investment advice.
TLDR – Jim Chanos is shorting DKNG, he’s a well-known shorter so other firms are probably piggybacking his trades and are short DKNG as well, same set up as Melvin capital and all the firms that hopped on their GME short, big mistake for DKNG shorts, the best quarter is about to come up, plus new states opened up for even more revenue that was not included in the forward guidance. In addition Jim Chanos went on CNBC and completely shit the bed with his bear math, and got all the fundamentals wrong about this stock.
DKNG is also well capitalized to continue to grow, even in a low interest rate environment, which makes this stock unlike the other growth stocks being sold off, because spending is within control and strategic, not at risk to have to raise capital to dilute shareholders. The company is moving toward Web 3.0 and is becoming more of a tech company then just a regular gambling company.
How does the price explode, short covering + short covering on dark pools, options gamma squeeze after breakout, Algos forced to de-basket DKNG from short high growth stock basket related to ARKK and macro event driven Algos (interest rates, j-pow tapering and money printer slowing down)
Price Point = $90+ in honour of Jim Chanos and claim that DKNG trades 30x revenue.
Reason #1 - Jim Chanos
This guy is smart, caught Enron’s accounting fraud but he’s lost his touch.
He hates meme stocks and those who trade them - https://markets.businessinsider.com/news/stocks/jim-chanos-short-seller-meme-stocks-gamestop-amc-greedy-entitled-2021-8
Now he’s shorting DKNG but using bogus math to do it and hoping Apes don’t know basic arithmetic.
He’s quoted in this interview https://www.thestreet.com/investing/chanos-short-draftkings-doordash with the following reasons to short DKNG:
“DraftKings has a valuation right now of 30 times runway revenue,” he told CNBC. “You can believe in sports betting ... but this business model is flawed.”
Response from the CEO :
Jason’s right, market cap was never 30x revenue, revenue consensus for 2021 is 1.2 billion, Jim Is suggesting the market cap is $36 Billion, DKNG has not come close to that in the past few months and the current market cap $12.72 Billion.
“If you quadrupled DraftKings’ revenue and gross profit ... and take their marketing spending, which is currently over 100% of revenue, to 10% of revenue, which is their target, and you keep overhead at today’s level ... DraftKings would still be losing $200 million a quarter,” Chanos said.
Below is from the income statement, 4x revenue gives you 851,276, he said take the marketing spending and make it 10% of revenue, so that’s 85,127.6. Keeping everything else the same the loss turns into a profit of $440,915.40. So why would he go on CNBC and say different, because he hopes nobody will do the math on their own and trust him. This is pure manipulation or he’s gone senile.
Changing a few lines of the income statement and keeping all else the same makes no sense as a bear case anyway, most lines in this income statement derive their value from previous entries or are items that would go up and down according to underlying factors, such as cost of revenue would increase with more revenue, expense related to admin would start to taper off over time and Etc.
Only reason this went anywhere is CNBC hyped Jim Chanos up to be an accounting expert, they even started the interview by reliving his Enron short, but in reality Jim has been losing money left and right and his firm is down a lot. This was a clear attempt by CNBC and Jim to manipulate paper hand investors to let their shares go for little to nothing.
Reason #2 – upcoming catalyst to reverse bad quarter
Shorts are going to want to get out of DKNG around this time, with the combination of NBA, NFL and NHL, the next earnings should be a blowout, plus will have the inclusion of new states that just legalized. Our hope is we send them off with a loss rather than a gain.
During the last earnings, it was revealed that the lower revenue than expected was caused by favorites winning in NFL games during the weeks that were included in that earnings reports. This is an outlier event that can happen to gambling stocks and as we know just like options trading, you win some you lose some. But based on this information we can project with the recent upsets, the next quarter should actually have a significant increase in revenue. Basically people like to string favorites together in parlays for a better payout, if those hit , the house loses, if there are a healthy amount of upsets, the house makes money, if there are a lot of upsets, the house makes even more money. Look at some of the wins and losses these past few weeks and you will see plenty of upsets.
Upsets outweighing favorites for the majority of the NFL season
Growth comes at a cost and we can see by the income statement, DKNG spent a lot to grow the company, but with that they got market leadership, brand recognition, acquired a quality operator in Golden Nugget Casinos, and overall increased shareholder value.
physical casino’s are falling behind the online providers, but competition remains fierce and requires spending to open new markets.
Inside buying – always a good sign
We have seen a combination of the founders and exec team buying shares in the open market or exercising and holding options of DKNG. This is a positive sign as this time of the year we would see more selling. Also we notice a lot of selling by the big execs in anticipation of new tax laws next year, Elon Musk, Jeff Bezos and even Microsoft’s CEO had sold significant amounts of shares. So seeing the execs at DKNG buy at this low price shows confidence in the company’s future.
Cash Burn and overspending concerns are overblown
We get the same argument from short sellers about this stock as we do for all growth stocks. They burn cash and that’s a signal to investors that the stock in not well capitalized and will need to raise funds either through debt or equity issuance, which is dilutive to shareholders.
But as we can see from the below figures from the cash flow statement, the cash burn is small relative to the actual cash balance. The net change could also be seen below along with the growth in revenue, the ROI on this is clear, the more they spend to open new markets the higher growth is but when these markets start to mature, like New Jersey, they can become profitable within 2-3 years.
So, the cash burn on DKNG differs from other growth stocks because they are not trying to invent a new product, spending millions on R&D and only to half the product flop, they are gaining market shares in states that are newly legalized for gambling and converting existing daily fantasy clients to sports betting clients. Low risk spending in my opinion because they have done this successfully in other states and continue to execute on the marketing campaigns, they spend on by obtaining the #1 position in the states they are in, over time. If the state is not worth spending on, too small or not enough potential users, they will just spend less, it’s not out of control by any means, and well within the cash balance they have.
The below tweet from the CEO should boost confidence in the stock for long term holders, to be well capitalized is a bold statement for growth stocks but not for DKNG. They have a large cash balance, little to no change in cash over quarters and have already stated an equity offering would only come after the stock passes $125.
DKNG can be the next Amazon or TSLA, in this case the physical casinos are physical retail and legacy auto. The growth story is the same, operate at a loss, continue to growth, kill the competition, and disrupt the market.
Trend change - Not just a Covid Play
More and more people are betting online, and this is disruptive to physical casinos. Even with the emergence of physical casinos into the online space like BetMGM and Penn with barstool, the motivation to pursue this area is not strong with physical casinos, due to cannibalizing themselves.
We see in this article https://www.espn.com/chalk/story/_/id/32753855/first-1-billion-month-nevada-sportsbooks , a huge trend change, over 64% of bets came from online, and this is in Nevada, a destination for physical casinos, imagine the rest of the country. And this came in a month were casinos were open and travel was not restricted in Vegas.
Espn deal + twitter
ESPN already has a relationship with DKNG from an earlier investment and a partnership would be worth billions. Same with twitter as the access to users opens opportunities to market and convert new users.
Differentiation from current gambling stocks
DraftKing’s has a strong focus on innovation as you can see by their patent filings, they focus on customer retention, which is a huge competitive advantage in this space, when customers can be swayed from one app to another with free promos. https://uspto.report/company/Draftkings-Inc/patents
They are becoming more vertically integrated, will own their own data in the future and have incorporated the tech stake from SBtech.
The entire exec team is focused on Web 3.0 and hired or is hiring for this next phase in gambling. Internally they continue to innovate beyond new games, and this is unique to DKNG, you can go on the job sites for MGM or Caesars and you won’t find any jobs for an engineering team, this is not an area they have any interest in, this is literally Sears vs Amazon at this point, physical casinos will always have Vegas as destination spot but not much else in a few years.
New roles for WEB 3.0
Blockchain Developer at DraftKings Inc. - https://www.linkedin.com/in/ben-weinberg-270196153
Blockchain Developer at DraftKings & Ephimera.com - https://www.linkedin.com/in/mehrad-kavian-39b58856 - Github this this developer, includes Video ƝƑŢ projects updated as recently as 6 days ago. Ephimera.com owned by Draftkings at this point at well. https://github.com/sesameJar?tab=repositories
Software Engineering Manager - https://www.linkedin.com/in/emma-ya-chih-hsueh-4565a264 - Scarcity labs co-founder and former CTO at Scarcity labs
Blockchain Developer at DraftKings Inc. - https://www.linkedin.com/in/lijia-hou
Current offering related to Web 3.0
Most analyst except 1 are extremely bullish on the future for DKNG and the average price point remains around 2x the current trading price, they can’t all be wrong.
Reason #3 - Heavy short sales in Dark Pools - Over 40% + Algo basket trading manipulation
For those interested, shorts are piling on through dark pools. Potential exist to squeeze. The use of dark pools is very interesting as we know this is to hide the obvious intention to tank the stock but the level it’s reaching is becoming absurd.
Showing similar level of manipulation that exists in AMC and CLOV, known hedge fund manipulated stocks. DKNG showing sharp declines in price despite upcoming catalyst of state legalizations and during crucial sports betting half of the calendar year.
DKNG is showing the same level of dark pool shorting as NKLA a known fraud stock. This make no sense other than manipulation to pin down the price for market makers to make money on options expiring worthless.
Dark pools Explained - https://www.youtube.com/watch?v=hq9waP7goSc
AMC type Dark pool shorting – video referencing this type of shorting from March 2020, pre- AMC Squeeze - https://www.youtube.com/watch?v=WWQ183XbZPo
Reference to Raw Shorting files - https://www.finra.org/finra-data/browse-catalog/short-sale-volume-data/daily-short-sale-volume-files
DKNG - https://fintel.io/ss/us/dkng
Algos shorting ARKK stocks
We see seemingly unrelated stocks moving down with each other for no reason. Zillow, Pelaton, TeleDoc, Zoom have no real relation to DKNG other than being in the ARKK ETF. This has been addressed by Cathie herself and we even see new ETFs popping up to inverse her fund. Wall Street is shorting a basket of stock related to ARKK and DKNG is being dragged down with them. DKNG differs from these particular stocks because they didn’t have a huge scandal like Zillow, or do an offering like Pelaton, or are considered a work from home stock like ZOOM but the price trend continue to match this basket of growth stocks. This is manipulation but once there is a breakout on DKNG the algos will have to cover and de-basket DKNG from this group similar to when TSLA broke out after their last earnings, which was also a Cathie wood stock.
Gamma Squeeze Potential
DKNG is a favorite of options market makers, with all the options outstanding, any breakout will send the stock flying in either direct, with enough buying pressure we squeeze up call options chain.
Option chain skews towards calls for the next few weeks
Quote from intelligent investor which relates to the current state of growth stocks
Positions – 300 Shares
15 – Jan 2023 100C options