A wave of concern swept through the online betting world Tuesday as two industry giants, DraftKings and Flutter Entertainment, faced simultaneous downgrades from Bank of America. The shift in outlook wasn’t based on a single issue, but a confluence of pressures threatening to reshape the landscape of digital gambling.
DraftKings stock dipped nearly 5% in early trading following the downgrade from “Buy” to “Neutral.” Analyst Shaun Kelley cited a troubling combination of factors: recent, unusually favorable sports results for bettors, a slower-than-expected expansion in iGaming, and the looming possibility of increased state taxes. These challenges collectively painted a less optimistic picture for the company’s near-term performance.
Adding to the pressure, BMO Capital also revised its expectations for DraftKings, lowering its price target to $63 from $65 and adjusting revenue forecasts for the third quarter. The culprit? Those same unfavorable September sports outcomes that saw bettors enjoying a winning streak at the expense of company profits.
Flutter Entertainment wasn’t spared the scrutiny. Bank of America similarly downgraded Flutter to “Neutral,” slashing its price target from $325 to $250. Concerns centered around declining structural hold rates, potential compromises impacting growth, the ongoing tax review in the UK, and the ever-present threat of changing gaming taxes in the US.
A significant, and recurring, element in both downgrades was the rising influence of prediction markets. Kelley warned of a potential “competitive marketing and price war” within this emerging sector, constrained by complex regulations and legal battles. The uncertainty surrounding these markets poses a substantial risk to established operators.
DraftKings, seemingly anticipating this challenge, recently acquired prediction-market startup Railbird. This strategic move positions the company to capitalize on the burgeoning market for sports contracts, leveraging Railbird’s federally regulated platform as a foundation for expansion.
While neither DraftKings nor Flutter’s FanDuel has yet experienced significant losses due to prediction markets, Kelley believes the next phase of growth for these platforms could introduce considerable disruption. The potential for “cannibalization” – where prediction markets draw revenue away from traditional sports betting – is a growing concern.
Kelley predicts that the legal and economic uncertainties surrounding prediction markets could cast a shadow over the industry for the next six to nine months, and potentially for years to come. He anticipates further negative developments, including increased competition and ongoing legal complexities, creating a turbulent environment for operators.
The situation highlights a pivotal moment for the online betting industry, forcing major players to adapt to a rapidly evolving landscape and navigate the challenges posed by this new form of sports engagement.
