1 Growth Stock Down 40% to Buy Right Now

DraftKings (NASDAQ: DKNG) has been on the losing side of the market lately, sliding by nearly 40% from the 52-week peak it reached in early 2025. The drop hasn't been about poor execution or slowing demand, but instead, the rise of sports-related prediction markets.

Online gaming companies like DraftKings are highly regulated at the state level. The business model is quite simple: Such companies take a piece of the action on every bet placed across their digital platforms.

DraftKings generates revenue in three main areas: regulated sports betting, its long-running daily fantasy sports contests, and its growing online casino unit. Sports betting is its biggest business, and same-day parlays have been a big growth driver for the company.

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Facing pressure

However, the business has come under pressure from prediction markets like Kalshi and Polymarket. Prediction markets are online platforms that let you buy or sell contracts on future events, such as who will win the next presidential election or even if a company's executives will say a certain word on their next earnings call. The contracts are structured as yes or no positions.

However, these platforms have recently started offering event contracts that look very similar to the parlays that are a big source of profit for DraftKings' sportsbook. Kalshi, for example, has recently reported some pretty large trading volumes lately that are largely believed to be tied to sports betting.

That said, this isn't just a simple case of increased competition from competitors playing by the same rules as DraftKings. Prediction markets, especially when applied to sports-related betting, currently occupy a legal gray area.

Several state regulators are actively challenging the premise that these so-called event contracts on sports should be treated as federally regulated financial derivatives, asserting instead that they are simply unlicensed, illegal gambling. States have been making a lot of money by taxing online sports betting, and it's difficult to see them giving up a chunk of this revenue stream without a fight.

Morgan Stanley analysts, meanwhile, have noted that prediction market users tend to be sophisticated and institutional players -- a very different clientele from the casual sports bettors who are DraftKings' bread and butter. These prediction market operators can also tap into large states, like California and Texas, where online sports betting is illegal. So, there is a possibility that a lot of their growth could be coming from these states.

Strong growth potential

While prediction markets pose a potential threat to DraftKings' market share, the company continues to grow quickly. In its most recent quarter, its revenue climbed an impressive 37% year over year to $1.5 billion. Even more important is that the company is starting to see strong operating leverage that is driving profitability.

In Q2, its adjusted earnings per share (EPS) surged 73% to $0.30, while its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) soared 134% to $301 million. Sportsbook revenue led the way, jumping 46%, while its sportsbook net margin climbed from 6.4% to 8.7%. Its iGaming revenue, meanwhile, rose 23%. The company is also focusing on free cash flow, and is targeting $750 million this year.

This shows that DraftKings is no longer in the land-grab stage, spending heavily on promotions to lure players to its platform. It has now transitioned to a profitable growth story. Meanwhile, the company continues to innovate with its sportsbook to drive growth, and has said it could launch its own predictions market.

The 40% decline in the stock from its 2025 high-water mark has lowered its valuation to a forward price-to-earnings (P/E) ratio of just 16.5, based on analysts' consensus estimates for 2026. That's a bargain for a growth stock whose underlying fundamentals remain strong. Yes, there are risks to its business due to competition from prediction markets, but favorable court rulings could easily make those risks go away.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.