DraftKings' big push into prediction markets triggers analyst pullback

What happened

DraftKings Inc., based in Boston, is leaning harder into prediction markets via its DraftKings Predictions product to bring in more users. That push is denting near-term profitability, with the company cutting the midpoint of its adjusted Ebitda guidance for this year by $575 million and unveiling a 2027 outlook that underwhelmed.

Shares dropped 21% after results released postmarket on Nov. 5, representing the largest one-day decline over the past four years. Year to date, the shares have fallen roughly 45%, tracking toward its weakest annual showing since 2022.

The market reaction and analyst moves

Downgrades followed quickly. At least five brokerages - including JPMorgan, Wells Fargo and UBS - shifted from bullish stances to the sidelines. As of Nov. 12, buy-equivalent ratings fell to 26, the lowest since February 2024, though about two-thirds of the 40 Bloomberg-tracked analysts continue to hold buy ratings on the shares. The average price target sits at $25.88, implying about 35% upside from Thursday's close.

Wells Fargo's Trey Bowers cut the stock to equalweight from overweight on Monday, saying, "What surprised us was the construction of the investment. It's the operating expenses related to startup costs around new states that were significantly higher, both this year and next, than our expectations." He added, "We've become more cautious on the digital gaming sector as the year progresses as the competitive intensity, in terms of sales and marketing spend as well as promotional spend, has continued to escalate against a backdrop of a very uncertain future for prediction-market-based sports-betting."

Smart investors quietly adopt new tools to sharpen judgment and stay competitive. We're hosting our first ever investor livestream on 11/17 to show you how to use ChatGPT and Claude to invest like a pro, hosted by Briefs Finance CEO Jaspreet Singh. Save your seat.

Legal risk, earnings and a cautious outlook

DraftKings raised this year's midpoint target for prediction-market spending to $675 million from roughly $250 million. Looking ahead to 2027, management projects the allocation will climb by a further $300 million compared with that level. Estimates are resetting: Bloomberg data indicate consensus Ebitda for the current fiscal year has dropped 64% over the last week, while 2027 profit expectations slipped almost 19%.

Regulatory uncertainty is a parallel headwind. Platforms such as Kalshi and Polymarket are facing escalating legal fights as states contend that sports-linked transactions evade state gambling regulations and tax obligations. Some analysts warn the dispute could reach the US Supreme Court within two years, with the possibility that sports event contracts are outlawed.

What it could mean for your portfolio

Not every analyst is walking away. Bernstein's Ian Moore contends the momentum behind DraftKings Predictions supports the spend, noting the company said October consumer volumes were nearly triple July levels. The bottom line: heavier investment, legal risk and fresh downgrades are reshaping expectations, while management is betting that bigger user growth now will pay off later.

Learning how thoughtful technology can refine decisions is part of disciplined investing. On 11/17, our CEO Jaspreet Singh goes live for our first ever investor livestream on how to use ChatGPT and Claude to invest like a pro. Register to join him.