What to Know Before Buying DraftKings Stock

Pay close enough attention to political and sports news these days and it's hard to avoid mentions of prediction markets. Operators of next-generation derivatives exchanges have become so mainstream that Kalshi -- one of the biggest companies in the space -- was the subject of an almost seven-minute-long interview on CBS Sunday Morning on Nov. 16.

Companies such as Kalshi, Polymarket, and their peers offer event contracts on everything from award shows to cryptocurrency prices to elections to what outfits Taylor Swift will wear, but where these companies have cast chills down the spines of public market investors is sports betting. Those fears are reflected by DraftKings (NASDAQ: DKNG) -- a stock that's off 15.48% over the past month and that closed 46.24% below its 52-week high on Monday.

DraftKings stock is under siege and prediction markets aren't entirely to blame. Image source: Getty Images.

That signal could be confirmation that investors interested in nibbling at DraftKings need to consider the prediction markets issue, but there's more to the story.

What Wall Street says is ailing DraftKings stock

There's a sense among sell-side analysts that punishment recently incurred by shares of DraftKings and FanDuel owner Flutter Entertainment (NYSE: FLUT) is overblown as it relates to prediction markets and there's some credibility in that view.

For example, October sports wagering handle -- the total dollar amount of bets placed -- in New York soared to a record $2.64 billion, indicating that bettors, at least in large numbers, aren't leaving DraftKings and friends for Kalshi. And why would they? Data indicate Kalshi has worse pricing on NFL bets than DraftKings and FanDuel and that scenario has matriculated over to the NBA.

Some experts believe the pricing discrepancy is attributable to Kalshi charging retail users what amounts to trading fees -- levies not applied by DraftKings and other traditional sports books.

So what gives? Why is this once beloved growth stock being taken to task? It's less about prediction markets than some investors think and more about soft fundamentals. Let's start with that old gambling expression about the house always winning. Well, that's not true because bettors are finding favorable outcomes this NFL season, resulting in disappointing third-quarter results from DraftKings and an even more ominous downward revision by the operator of its 2025 guidance.

Making matters worse is sluggish monthly unique payor and revenue growth, which checked in at just 2% and 4%, respectively, in the September quarter. Those aren't growth stock levels and as the New York handle data confirm, DraftKings isn't ceding customers to prediction markets. It's encountering difficulty attracting new clients and compelling them to spend at high rates.

Speaking of DraftKings' spending...

Sports wagering is like any other industry in that companies need to dole out some cash in order to remain competitive. DraftKings will be doing just that when online sports betting rolls out in Missouri next month. That could be an attractive market for operators, but in order to get started on the right foot, DraftKings and its competitors need to spend on marketing and customer incentives.

That usually results in at least a quarter or two of scant or no profits in new markets. Speaking of profits, DraftKings doesn't have them and that's another source of long-running concern among shareholders.

The Missouri entry isn't the only item requiring an outlay of capital. To its credit, DraftKings isn't taking the prediction markets threat lightly. Last month, it announced the acquisition of Railbird Exchange, which sets the stage for DraftKings Predictions to come to life over the near term. That deal is rumored to have cost the buyer $250 million and while that entire sum likely isn't flowing to the seller all at once, it represents more spending by an unprofitable company with no guarantee the expenditure will pay dividends.

How DraftKings can rebound

There is a case for a DraftKings resurgence and it's not overly complex. One simple ingredient would be a spate of NFL underdogs covering and totals going under (retail bettors usually side with favorites and overs). A strong, cost-efficient start in Missouri could also calm skittish investors.

As would a solid debut by DraftKings Predictions, particularly if data emerge showing that platform is wresting market share from Kalshi.

In the meantime, management could do itself and investors a favor by deploying its newly expanded buyback program -- it doubled to $2 billion from $1 billion -- to gobble up some shares at depressed prices. That would be an act of confidence rather than just talking about it.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool recommends Flutter Entertainment Plc. The Motley Fool has a disclosure policy.