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.”
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.
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.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.