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Targeted by short sellers, DraftKings gets aid from Reddit’s online brigade

DraftKings CEO and founder Jason Robins.Barry Chin

The stock price of DraftKings fell on Tuesday after a leading short-selling firm said it uncovered potential legal issues at the high-flying sports betting company. But the price recovered during the day, as the Boston company denied the allegations and traders who frequent the Reddit online stock trading group WallStreetBets discussed buying DraftKings stock.

Hindenburg Research, a New York-based investment firm that bets against companies by shorting their stock, sparked the sell-off with its report. Hindenburg alleged, among other things, that DraftKings’ European subsidiary, SBTech, was providing online gambling software in countries where such wagering is not permitted. And Hindenburg noted that while DraftKings lost $844 million last year, its stock market value of $21 billion exceeded the combined value of four top competitors, FanDuel, Wynn Interactive, Super Group, and Kambi.

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”We think the company is standing on several landmines that will inhibit its ability to fulfill the market’s lofty expectations,” Hindenburg wrote. The firm did not reveal the size of its bet against DraftKings stock.

DraftKings said a pre-merger review of SBTech’s current business uncovered no problems.

”This report is written by someone who is short on DraftKings stock with an incentive to drive down the share price,” the company said in a statement on Tuesday. “Our business combination with SBTech was completed in 2020. We conducted a thorough review of their business practices, and we were comfortable with the findings. We do not comment on speculation or allegations made by former SBTech employees.”

Shares of DraftKings dropped as low as $44.65, a 12 percent decrease from Monday’s close of $50.62. The closing price Tuesday was $48.51, down 4.2 percent.

Before Hindenburg’s broadside, the stock had nearly tripled since the company went public in April 2020 by merging with a special purpose acquisition company called Diamond Eagle Acquisition. As part of the SPAC deal, DraftKings also merged with SBTech, a Bulgarian company that developed the technology behind many online gambling sites around the world.

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Hindenburg is among a new class of short-selling firms that have emerged in the past few years as a counter to rising hype and speculation in some sectors of the stock market, particularly around SPAC mergers. Hindenburg previously bet against electric vehicle makers Nikola and Lordstown Motors, which both went public via SPACs. Both stocks subsequently plummeted and the companies’ CEOs departed.

The Reddit discussion section known as WallStreetBets has taken up the cause of stocks targeted by short sellers and helped drive their prices up, most famously in the cases of retailer GameStop and movie chain AMC. On Tuesday, the most popular comments on the site about DraftKings suggested buying the stock because the company’s ticker symbol, DKNG, reminded people of the video game Donkey Kong.