Sports-Betting Stocks Face Growing Threat From Prediction Rivals

An NFL 2025 game between San Francisco 49ers and Los Angeles Rams in Inglewood, California, Oct. 2.

(Bloomberg) -- Stock traders are making a clear prediction about prediction markets: They’re fast becoming the next big thing for online gambling.

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That speculation raced across Wall Street this week after Robinhood Markets Inc. — which played a pivotal role in unleashing the pandemic’s day-trading frenzy — and the exchange Kalshi reported that prediction markets wagers are surging at a rapid pace. Robinhood, which has a partnership with Kalshi to offer wagers on everything from football games to political races and other everyday events, saw more than 2 billion prediction contracts trade in the third quarter alone.

Traders rushed to dump shares of online betting operators, with DraftKings Inc. tumbling over 16%, its biggest weekly drop since late 2022, and rival Flutter Entertainment PLC, which operates FanDuel, sliding more than 8%. Wall Street analysts were equally swift, slashing price targets and in one case double-downgrading DraftKings’ shares to a sell-equivalent rating.

“These companies need to come out with a strategy for investors — whether it’s launching prediction markets or stepping up marketing,” said Jordan Bender, an equity research analyst at Citizens, who said he has been deluged by inquiries from clients. “Until that happens, the prediction markets present a risk.”

The rise of prediction-based betting venues is promising to deliver another shakeup to the gambling industry, where online sites have been encroaching on the businesses of casino operators like Caesars Entertainment Inc., MGM Resorts International and Penn Entertainment Inc. since a 2018 US Supreme Court decision allowing states to legalize sports betting.

Now, those one-time upstarts are facing their own challenge from markets like Kalshi and Polymarket that started attracting widespread interest in the runup to the 2024 presidential election. The exchanges have worked to draw in sports gamblers, but until recently have lacked the ability to offer the type of complex parlays — or high-payout wagers on a series of outcomes — that are a key profit driver for DraftKings and FanDuel.

That seemingly changed after Kalshi quietly rolled out customizable parlays for a pair of NFL games on Monday night. That was seen as likely to expand its sports-betting operation, which had already shown a sharp spike during the first few weeks of the US professional football season. Kalshi set new weekly volume records for each successive week of September, the company told Bloomberg News, with last Saturday’s volume of $260 million surpassing Election Day’s record of $245 million.

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President Donald Trump’s tax cuts also extended a bit of an edge to the prediction markets, where wagers are treated like financial contracts. A provision of that law allows gamblers to only deduct 90% of their losses against their winnings — meaning someone who breaks even with $1 million in winning bets and $1 million in losing ones would only be able to deduct $900,000, leaving $100,000 in taxable income. That will give them an incentive to shift their businesses to the exchanges to avoid being hit with higher tax bills.

The prediction markets also have ties in Washington: Donald Trump Jr. joined the firm as a strategic adviser shortly after his father’s inauguration and was recently added to Polymarket’s advisory board after his venture-capital firm invested in the company.

The prediction markets are still facing some obstacles, with several states claiming that Kalshi is running afoul of their gambling laws, and FanDuel has teamed up with CME Group Inc. to counter the threat by offering its own contracts later this year.

Moreover, the dominant gambling sites still have plenty of fans on Wall Street. More than 80% of brokerage analysts have buy ratings on DraftKings and Flutter, according to data compiled by Bloomberg. Analysts from Morgan Stanley, Jefferies, and Oppenheimer & Co. advised investors to buy any dips in the stock, saying the competitive threat is overblown.

But the speed with which the prediction markets have made inroads into their businesses has rattled confidence in the outlook for the incumbent companies. Representatives from DraftKings and FanDuel’s parent didn’t respond to requests for comment.

It was only in August that Robinhood announced it was allowing customers to start betting on the most popular professional and college football games. This past week, Robinhood’s chief executive officer, Vladimir Tenev, said the partnership has resulted in over four billion prediction-market contracts being executed through his company, with half in the third quarter alone.

The gathering threats drove Northland Securities analyst Greg Gibas to cut his rating on DraftKings by two steps to underperform. That turned him into the only investment-bank analyst tracked by Bloomberg to recommend pulling out of the stock.

Spruce Point Capital Management piled on by announcing it was shorting DraftKings shares, betting it will decline. The firm said Wall Street has been downplaying the “tectonic shift” in the sports betting market even after the company’s five-week slide. It predicted the shares may fall as much as 60% due to rising competition.

“Prediction markets are seeing faster adoption in the critical NFL season, while DraftKing’s handle growth is slowing,” said Spruce Point founder and Chief Investment Officer Ben Axler. “They are a viable alternative to traditional players like DraftKings.”

--With assistance from Christopher Palmeri.

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