The WallStreetBets Reddit community is eyeing its next target, DraftKings (NASDAQ: DKNG). One thing retail investors look for when buying shares is a high ratio of short interest in a stock, which means that a lot of people are betting that the company's stock price will fall. DraftKings is also being hyped a lot by traders on Twitter and Reddit, with the intention of pumping up the company's share price. These two factors coupled together result in what is known as a meme stock.
DraftKings can be classified as a meme stock after investment firm, Hindenburg Research, announced this week that it had a short position against the sports gambling company.
Hindenburg's report compared the company's valuation to its rivals and raised some concerns about its future potential in the highly competitive online gambling landscape. That wasn't the big news from the report though, the research firm also made some bold allegations about a company called SBTec, whom DraftKings acquired with its SPAC.
Hindenburg claimed that DraftKings' association with SBTec "brings exposure to extensive dealings in black-market gaming, money laundering, and organized crime." However, DraftKings refuted these claims, stating that it was comfortable with SBTech's business and conducted extensive reviews on the company before they merged.
After reporting its findings, Hindenburg announced that it has shorted the stock, meaning that it bet its share price will fall in the future.
Hindenburg's claim that DraftKings' actions are 'questionable', was seen as very ironic by the WallStreetBets community. This is due to many people believing that the research firm is purposely slandering the betting company's reputation in the hopes that DraftKings stock will fall because Hindenburg has a short position against it. The WallStreetBets community also stated that it's not a big surprise that the gambling industry has some shady aspects to it and has called out hedge funds' own immoral trading behaviors.
As a result of Hindenburg's report, DraftKings shares are down almost 10% over the last five days. This fall in share price, coupled with short interest in the company from investment firms, has made meme stock investors sit up and pay attention to DraftKings.
If the meme stock traders give DraftKings the same amount of attention as they gave GameStop and AMC, the stock could be in line for a short-squeeze.
Be warned though, if this happens DraftKings shares are expected to become very volatile.
So if you are thinking about investing in the stock, we recommend you to look into the fundamentals and future potential of the company before buying shares. For long-term investing success, it's always better to invest in a company because you believe in it and not because it is just another meme stock.
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