Online gambling company DraftKings Inc. (NASDAQ:DKNG) shares fell sharply on Tuesday morning to extend Monday losses before bouncing back later. The stock price created a downward price gap after Hindenburg Research warned about its recent merger with SBTech, another online gambling company linked with illegal gambling.
However, Credit Suisse allayed those fears later on Tuesday, saying the level of exposure to SBTech business risk is minimal relative to the sell-off of DKNG shares. The stock recouped some losses to close 4.17% below Monday’s close.
Is DKNG sell-off overblown?
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According to Credit Suisse analysts, DraftKing’s sell-off on Monday morning was overdone. The firm said a minimal value of DKNG is exposed to SBTech, adding that DraftKings bought the company only because of its gambling platform rather than its revenue. The firm illustrated this by saying that SBTech’s 2020 revenue of $105 million is equivalent to $1.00 per share of DKNG at 5X the revenue. The firm said,
While not ideal, in a worst-case scenario, an SBTech issue would not necessarily interfere with betting operations today. We would use today’s weakness as an opportunity ahead of potential Canada legalization (senate meeting today) as well as New York, both of which are catalysts for DKNG.
It also added that DraftKing’s current betting platform provider Kambi is an entirely separate provider of betting technology. Therefore, the risk of exposure to the illegal gambling linked to SBTech is minimal to justify the sell-off.
Technically, DraftKings shares appear to be attempting a rebound following Tuesday morning’s sharp fall. The stock price continues to move closer to the oversold levels of the 14-day RSI after a significant sell-off during the last two months.
Credit Suisse’s comment could drive investors to target potential rebounds at $53.10 and $58.23. On the other hand, bearish investors can target extended pullbacks at $44.13 and $39.82.
Bottom line: DraftKings sell-off could be overblown
In summary, DraftKings shares have pulled back more than 32% since 19th March. The stock fell sharply on Tuesday before mounting a late rebound. Credit Suisse analysts think that the new acquisition, SBTech’s risk exposure to illegal gambling, has minimal impact on DKNG’s top-line.
And looking at the gambling platform’s 2020 revenue of just $105 million compared to DraftKing’s trailing 12-month revenue of about $838 million, they could be right. Therefore, DKNG shares could extend Tuesday’s rebound in the coming days.
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