Investment

Are DraftKings short sellers short-sighted? Jason Robins thinks so as he salutes shareholders with “long-term vision”

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By Jake Evans - 24 Mar, 2022

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Jason Robins has poured scorn on DraftKings short sellers while insisting he won’t be distracted by the operator’s share price performance.

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Robins took to LinkedIn this week to re-share his appearance on the podcast of Huddle Up founder Joe Pompliano, where Robins said: “I don’t like short selling and I’ve been pretty vocal about that.”

As part of the LinkedIn update, Robins posted: “As a business leader and entrepreneur, I’ve been told ‘no’ countless times. The biggest lesson I’ve learned from these rejections is how to pivot in order to stay aligned with the brand, the mission, our goals and our community.”

Outlining his advice for budding entrepreneurs in a message that could also ring true for those short on DraftKings stock, the executive added: “Don’t be short-sighted in your journey, especially in sports tech.”

Throughout the interview, which first aired in December, Pompliano was trying to ascertain how DraftKings strikes the right balance between long-term business prospects and short-term share price movements.

DraftKings stock has plummeted by 63% over the last six months. Before that, a June short seller report published by Hindenburg Research sought to expose the alleged black-market activity of DraftKings’ in-house sports betting technology provider SBTech.

A December spat was then ignited when legendary short seller Jim Chanos outlined his short position on DraftKings due to the stock’s high valuation and ballooning marketing costs.

At the time, Chanos said DraftKings’ math didn’t add up. He described the business model as flawed before calling the operator’s forecast losses “completely and totally insane”.

Robins hit back, insisting Chanos had got his numbers wrong – and he had. Earlier this month, Chanos admitted on CNBC that he had made a mistake after being sent a letter from DraftKings’ legal team. The New York-based investment manager has maintained his negative view on the stock, however.

Discussing the initial conflict on The Joe Pomp Show, Robins said: “I find it very strange that people can take a short position and then go on [television] and make up stuff that isn’t in reality. That just happens. It does seem weird to me, but I guess that is the world we live in.”

“I also think people don’t like short sellers. It’s like those who play Craps and the guy at the casino who is betting the don’t pass line. Like, really? Everyone else at the table is on the same team and you’re going to be the one person that wants to root for something to happen whereby everyone else loses and you win. Why do that?”

One major concern for Chanos – and indeed many other investors – is the amount DraftKings is spending on marketing to acquire customers in the US.

Questions have been asked as to whether that level of spend is sustainable and whether DraftKings can achieve profitability before the cash reserves run dry.

In full-year 2021, the operator’s sales and marketing costs increased by 98% to $981.5m as adjusted EBITDA losses reached $676.1m, worsening by 72.5% year-on-year.

This resulted in an operational loss of $1.56bn and a net loss of $1.52bn, although revenue more than doubled to $1.3bn.

“A year ago, it was growth, growth, growth and who cares how much cash you’re burning?” said Robins on the podcast. “Now there is more concern over how much cash you’re burning, but our strategy didn’t change, our playbook didn’t change and the way that we make decisions with analytics and metrics didn’t change.”

Robins was in defiant mood when he spoke to Pompliano, who has amassed more than 370,000 followers on Twitter after starting a free daily sports business newsletter.

“If you have conviction that what you’re doing is going to lead to a strong EBITDA number and a high growth rate for many years to come, you keep doing it,” said Robins. “The market will go back and forth but those are things you can’t control.

“Ultimately the value of every stock will reflect what their results are, but in the short term, that may not be the case. Amazon for example was over $100 in 1999 and dropped to a little over $5 – it literally lost 95% of its market value, but now it’s a $3000+ stock,” he added.

DraftKings’ share price decline – in recent months at least – has coincided with a macro downturn due to rising oil prices, Russia’s war in Ukraine and a sharp increase in the cost of living.

The online gambling industry as a whole is also on the uncomfortable side of a very difficult comparative period after enjoying hockey stick growth throughout much of the Covid-19 pandemic – both in terms of revenue and stock performance.

“Things happen, there are macro trends that happen,” said the DraftKings CEO. “Right now, all growth is trading off, our sector is trading off, but I can’t control that. What I can do is make sure that the things we’re doing allow us to build a better mousetrap, create the most profitable high-growth company that we can and ultimately the share price will reflect that over time.”

DraftKings, which began life in 2012 as a daily fantasy sports company, went public via a SPAC merger two years ago. That combination with Diamond Acquisition Corp saw the company acquire SBTech and take control of its own sports betting technology at a crucial time following the repeal of PASPA.

When the stock went live on Nasdaq in April 2020, it was priced at $10. It closed last night at just shy of $19, but that is not remotely reflective of the journey to date.

The stock peaked almost a year ago today, at a closing price of $71.98 on 15 March 2021. It has fallen from a market cap of around $30bn to just short of $8bn at the time of writing.

When The Joe Pomp Show episode went live three months ago, the stock hovered around $31. Things move fast in this space.

“If you told me when we went public that we’d be 3x two years later, I would have loved that and been thrilled with that – it would have been a dream come true,” said Robins.

“I try to remind myself and I try to remind my team that everybody’s expectations get reset by what has happened recently and that everybody has a short memory as that is the nature of humans. But if you force yourself to step back and look at long-term trends, that is what matters.

“Those that believe in the vision and are with us for lengthy periods of time are the investors we want. Somebody who is trading in and out of our stock and trying to make a 5% gain is not interesting to us. We want people that believe in the long-term vision and think that what we’re doing is going to create tremendous shareholder value,” he added.