DraftKings Short Sellers Fate Hinges on Major League Baseball Coronavirus Wranglings

Posted on: August 3, 2020, 12:12h. 

Last updated on: August 3, 2020, 02:28h.

DraftKings (NASDAQ:DKNG) stock remains a favored target of short sellers. The fate of their bearish bets against the sportsbook operator’s shares could reside largely with Major League Baseball (MLB).

DraftKings A Favorite With Short Sellers
Some traders are hoping DraftKings stock falls and they could use some help from Major League Baseball. (Image: Reuters)

The equity posted a modest July loss. But the retrenchment accelerated in the final week of the month due in part to speculation that the already shortened 2020 MLB season is on the brink after several players and coaches from the Miami Marlins and St. Louis Cardinals tested positive for the coronavirus. On Sunday, it was revealed that New York Mets outfielder Yoenis Céspedes is opting out of the season, citing COVID-19 concerns.

Data confirms there are links between short sellers’ treatment of DraftKings and the return of sports. About $60 million, or 1.7 million shares, worth of bearish bets against the stock were covered in July as MLB started and the NBA returned, followed by the resumption of the NHL on Aug. 1.

Much of this short covering was due to positive revenue implications due to the return of live professional sports in the US., Major League Baseball starting their abbreviated season recently, and both the National Basketball Association and National Hockey league are starting play this week,” S3 Partners Managing Director Ihor Dusaniwsky in a recent note.

As of July 31, short interest in DraftKings is $680.44 million. Just two gaming stocks — Caesars Entertainment (NASDAQ:CZR) and Wynn Resorts (NASDAQ:WYNN) — are more heavily shorted.

Big Difference

Of the three leagues currently competing, MLB is the only one where teams are traveling to play each other. The NBA and NHL are competing in “bubbles” in Orlando, Edmonton, and Toronto, respectively.

The NBA and NHL strategy appears to be working. While MLB is reporting an uptick in COVID-19 cases, the NBA’s most recent batch of tests cleared 344 players as “negative” for the virus. The NHL also revealed zero positive cases ahead of the start of bubble play.

This is relevant to DraftKings investors for multiple reasons. First, speculation is intensifying that if the coronavirus situation in baseball doesn’t improve, MLB will scrap the season, denting revenue for sportsbooks. Second, the NFL season is right around the corner, and that league is, at least for now, eschewing the bubble idea.

Football is the most wagered-on sport in the US. Already facing the specter of fewer college games in 2020, sportsbook operators would feel significant pain if the NFL cancels its 2020 season, though the league isn’t giving indications that will happen.

Sports and Shorts

If one or more of the four major domestic leagues encounters coronavirus-related difficulties that force game or season cancellations, DraftKings short sellers could be emboldened. Conversely, those traders could feel the pain of their own if MLB, the NBA, NFL, and NHL are able to complete their seasons.

“If the re-emergence of professional sports is delayed or interrupted, we should see some price weakness in DKNG’s stock price, as its revenue stream would be severely affected, and short sellers to look once again to build their positions,” said Dusaniwsky. “If the MLB returns to full participation and the NBA and NHL “bubble games” go off without a hitch, we should expect further DKNG price strength and short sellers to continue their recent trend of short covering.”

He adds that short covering in DraftKings is likely to continue if not accelerate into the start of football season because of the company’s dominance in daily fantasy sports (DFS).