There was nothing but bad news today for 500.com (WBAI), but for some reason, the company’s shares have skyrocketed today. The stock climbed as much as 30.47% to $21.87 per share despite a trio of unexpected, terrible news.
Another interesting activity that’s going on in 500.com shares today is a sudden surge in the number of put option purchases, whereas in the last couple of weeks, options buyers have strongly favored calls.
Market manipulation on 500.com?
This certainly suggests that there may be some market manipulation going on here. Of course we can’t know who might be manipulating the stock, but the sudden inflation in share price despite the heap of bad news is highly suspicious.
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Trading volume also skyrocketed today, with 5.68 million shares having exchanged hands as of this writing, compared to the daily average volume of 1.67 million shares. The company’s 52-week range is a wide margin of $7.31 to $42.28 per share.
500.com disappoints on earnings
Today 500.com released its latest earnings report, posting losses of 6 cents per share, compared to the analyst estimate of 25 cents per share in earnings. The Chinese company’s revenue also missed big time, coming in at $15.9 million, compared to the consensus at $22.75 million.
The company posted a 12.9% decrease in the number of active users quarter over quarter. The number fell from about 984,000 in the fourth quarter of last year to about 857,000 in the first quarter of this year. Management gave the reason for this decline as Chinese regulators’ temporary suspension of online lottery sales in March.
New active users made up 12.4% of 500.com’s total purchase amount during the quarter, a significant decline from 52.4% in the previous quarter.
Online lottery sales suspended
500.com reported that all of the sports lottery administration centers to which it provides sales services temporarily suspended the acceptance of online lottery purchases. Now to be fair, this bit of news isn’t new, as it was revealed last month. At that time though, the stock was not affected much.
The suspension was the result of a notice from China’s Ministry of Finance, Ministry of Civil Affairs and the General Administration of Sports. The notice was related with potential problems with self-inspection processes. 500.com is now not generating any revenue because of that suspension. Management expects the total purchase volume for the current quarter to be zero and noted that it’s unclear just how long the suspension of online lottery sales will last.
500.com’s CEO resigns
As if those two problems weren’t enough, 500.com’s CEO, Man San Law, resigned from that position, although he does remain chairman, which is interesting. The company’s board of directors appointed President Zhengming Pan as the next CEO.
Further, Qi Li resigned from the board due to personal reasons, and Zhengming Pan will also fill that position on the board.
Carson Block is shorting 500.com
Carson Block revealed in September that his firm Muddy Waters was short on 500.com. He claimed the company was in a gray area legally and that its licensing framework isn’t clear. He noted that China’s Ministry of Finance prohibits sales of online sports lottery tickets across borders, which makes the MoF’s suspension of online sales particularly interesting.
Further, he stated that employee bank accounts were used to collect winnings and pointed out that 500.com had claimed in a past quarter that there were 20 million downloads of its app during that quarter. However, at that time, the app stores indicated that fewer than 2 million people had downloaded the app during the quarter.
500.com refuted all of Block’s allegations at that time, stating that the use of employees’ bank accounts to collect prize money was necessary because regulations state that only natural persons who present the winning lottery tickets can claim prizes. The company also said the MoF had approved its business model and explained that the statement about app downloads was a mistake, as management meant a total of 20 million downloads rather than 20 million in a single quarter.
Will 500.com’s rally be short-lived?
It seems many investors think the pain 500.com is inflicting on Block’s short position in the stock could just be temporary, however.
In addition to the suspicious increase in 500.com’s share price today, Schaeffer’s Investment Research noted another interesting activity in the stock. The firm saw six times the normal pace of puts crossing the tape “with buy-to-open action seemingly taking place at the June 17.50 put.” This means investors are betting that today’s rally is going to be short-lived and that the stock will fall back under $17.50 per share by June 19.
The firm further noted that most speculators on 500.com previously preferred calls rather than puts, according to data from the International Securities Exchange, the Chicago Board Options Exchange, and NASDAQ OMX PHLX. In the last two weeks, investors bought to open 2.38 calls on 500.com for every put that was purchased.
Short interest in 500.com on the rise
Apparently Carson Block’s short thesis has begun to spread throughout Wall Street, which is evident because over the last two reporting periods, short interest in 500.com skyrocketed by 44.1% to more than one-third of the float. Schaeffer’s suggests that some of the call buying that’s been going on recently may have been investors who had sold shares of the stock short and were hedging their bets.