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Why DraftKings Stock Plunged Today

What happened

Shares of DraftKings (NASDAQ: DKNG) fell 9.4% on Friday after noted short-seller Jim Chanos said he was betting against the sports betting company.

So what

Chanos believes the stock is drastically overvalued given the company's strategy of spending heavily on marketing to fuel its growth.

"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. "That is completely and totally insane."

Image source: Getty Images.

It should be noted, however, that DraftKings CEO Jason Robins vehemently disagrees with that view. During an interview with CNBC, he said that Chanos' "math makes no sense."

"Obviously, if we quadrupled gross profit, cut marketing to 10% of revenue, and kept overhead flat, we would not be losing $200 million per quarter," Robins said.

He also challenged the short-seller's assertion that his company's stock was trading at "30 times runway revenue." "We are not trading anywhere near 30 times revenue," Robins said. "It's less than half that."

DraftKings shares currently trade for less than 11 times trailing-12-month sales, according to Yahoo! Finance.

Now what

DraftKings, like the sports betting industry as a whole, is controversial. And while the company has a massive potential growth opportunity before it as more states move to legalize sports gambling, it remains to be seen whether its spend-now-profit-later strategy will pay off in the long run. Thus, in the near term, DraftKings' share price is likely to remain volatile as the bulls and bears continue to battle over its stock.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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