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Sports Betting Stocks Plunge As Chanos Reveals DraftKings Short

DraftKings’ penchant for excessive marketing spending appears to have investors worried, as the popular sports betting stock has continued its plunge to its lowest recorded price over the last 52 weeks.

Currently trading at $28.37 a share, DraftKings (NASDAQ: DKNG) stock prices fell 9.4% over Friday’s session in response to acclaimed short-seller Jim Chanos revealed that he had identified the brand as overvalued when considering the excessive outflow of cash the company relies on to promote growth.

The short-seller appeared on CNBC Thursday where he announced that he had in fact shorted the stock and argued his case.

“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.” 

“That is completely and totally insane.”

Chanos, president and founder of investment firm Kynikos Associates, took his criticisms a step further by tweeting out comments made by DraftKings CEO Jason Robins and blasting his arguments.

Robins didn’t hold back, however, and questioned the math used by Chanos to come to his concerning conclusion.

The CEO responded in a Friday morning appearance on CNBC, stating that “We are not trading near 30x revenue. It is less than half of that. I’m not sure what he’s doing.”

Robins added, “he is a smart guy. I’m sure he knows better. We all have to get up in the morning and look in the mirror. Some people are looking to make a buck. We are not focused on people selling short. We are focused on people who are true believers.”

The spat continued, as Chanos once again took to Twitter to publish his calculation and defend his opinion on the current valuation of the sports betting stock.

With sportsbook operators relying on the “spend now, profit later” approach, brands like DraftKings are admittedly going all-in on new jurisdictions to secure valuable market share. The hope is that this frontloaded market spending will entice new bettors to make their brand the shop of their choice and that the lifetime value of a customer will eventually balance, and ultimately swing the financial balance into a profitable one.

While the argument in favor of long-term success remains strong, it remains difficult to determine just how long it could take for the tide to turn. As mentioned last week, increased lending rates from the Fed will also delay this trajectory, and investors are making their concerns evident on the trading floor.

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