DraftKings' expensive bet on prediction markets is crushing its stock

By Bill Peters

Shares of the online betting platform slid more than 26% on Friday, as analysts worry about regulation and competition

DraftKings said its push into prediction markets would cut into profits.

Like other betting and trading apps, DraftKings is going all in on prediction markets - and investors and analysts are getting worried.

Shares of the sports-betting platform (DKNG) were tumbling more than 26% on Friday, after the company late Thursday said its increased investment in its prediction-markets segment would cut into profits. Prediction markets allow users to place wagers on a variety of events, including elections, economic developments, and sports and entertainment events.

DraftKings on Thursday said it planned to invest $650 million to $700 million in prediction markets this year. It expects $175 million to $275 million in adjusted EBITDA - or earnings before interest, taxes, depreciation and amortization - over that period, compared with a forecast in August for $700 million to $900 million.

The company said it expects fiscal-year 2027 prediction-markets revenue of $650 million to $750 million, with a predictions-related investment of $250 million to $350 million.

MoffettNathanson analyst Robert Fishman, in a research note on Friday, said that DraftKings was "essentially putting all of their chips on the future of a business that still has plenty of outstanding unknowns."

In addition, he noted that by taking a big swing at prediction markets, DraftKings would be going up against the likes of Polymarket and Kalshi. (Polymarket has a data partnership with MarketWatch publisher Dow Jones.)

"It is one thing to have confidence when you are leading or battling for first place in an industry you are well positioned to win long term," Fishman said. "But what happens when you are competing as a distant No. 3, with a player that is 20 times your size continuing to raise new private capital at meaningfully higher levels than your current valuation?"

Other trading sites, like investment app Robinhood (HOOD) and crypto exchange Coinbase (COIN), have also pushed further into prediction markets. Both sports betting and prediction markets face the prospect of more regulatory scrutiny, particularly as the Democrats prepare to take control of Congress, amid concerns about insider trading and gambling addiction.

DraftKings, in its earnings release on Thursday, said that its predictions business is driving growth for the company. Co-founder and CEO Jason Robins said more than 1.6 million customers have engaged with its predictions segment in some way this year to date, and added that the company was "set up for an exceptional 2027."

The company said its core business continued to generate "significant" free cash flow, which it was using to pay for growth in its predictions segment.

"Our predictions customers are highly engaged, retaining at high levels and trading significant volume," Robins said on DraftKings' earnings call Friday.

CFO Alan Ellingson said during the call that the company would "continue to monitor regulatory developments related to sports predictions and will adjust our level of predictions investments accordingly."

DraftKings' stock is down nearly 50% so far this year. BofA analyst Julie Hoover said in a note on Friday that more spending discipline was likely necessary for the company.

"Investors are disappointed by the magnitude of [prediction-market] investment given the looming regulatory risk around sports event contracts," she wrote.

"DKNG's desire to be best-in-class has driven its top-line success, but greater guardrails around spend, particularly in the current regulatory backdrop, are critical to drive the bottom line and stock," she added.

-Bill Peters

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11-06-26 1251ET