The Contrarian Case: Why Prediction Markets Create a Buying Opportunity for DraftKings and FanDuel

The Overreaction

DraftKings (DKNG) and Flutter (FLUT) have been under heavy selling pressure, losing around 25-30% of their market caps in the aftermath of the euphoria around prediction markets’ massive funding and launches. Prediction markets may take away some of the handle from straight sports wagers; however, FLUT and DKNG still have an ironclad hold on the higher-margin parlay handle. Further, prediction markets launching in states where sports betting has not been legalized—avoiding state taxes—will push these states toward capturing lost tax dollars sooner.

We think the market has it backwards.

The Fundamentals Tell a Different Story

Let’s look at what’s actually happening in the business. Both companies continue to grow handle, revenue, and users while prediction markets are supposedly eating into their customer base. Despite downward revisions in guidance due to unfavorable sports outcomes and increased investments, the underlying growth trajectory remains strong, with year-over-year increases in key metrics.

DraftKings Performance

Full-year 2025 revenue guidance was revised to $5.9B–$6.1B (from an earlier $6.3B–$6.6B), reflecting a 25-30% growth over 2024’s $4.7B, but still indicating resilience amid competitive pressures. User growth continues, with monthly active users contributing to sustained engagement.

FanDuel (Flutter US) Performance

FanDuel, under Flutter, showed robust US performance:

Group revenue for Q1 2025 was $3.7B, with FanDuel driving significant contributions. Full-year group guidance was adjusted to $16.69B due to investments, but US sportsbook AMP grew 5% in Q3, and iGaming AMP surged 30%.

The Parlay Moat Is Real

Here’s what the bears are missing: same-game parlays (SGPs) aren’t just another product—they represent the entire profit engine of modern sportsbooks. While neither company discloses parlay-specific revenue directly, we can see the impact clearly in their margin data. Parlays account for 67-70% of sportsbook revenue and up to 85% of profits for DraftKings and FanDuel, with parlay bets comprising 54-72% of total wagers.

Sportsbook Hold Rates: The Parlay Story

FanDuel’s higher structural margins (e.g., 13.6% in Q2 2025) versus DraftKings’ (e.g., 10.4% in Q1) suggest greater parlay penetration and more efficient promotional spend. If we assume parlays contribute the incremental 5-7 percentage points of margin, that’s roughly 40-50% of sportsbook gross profit coming from parlay-driven hold. The gap between straight bet hold (~5-7%) and structural hold (11-13%) is almost entirely attributable to parlays.

The Liquidity Problem Prediction Markets Can’t Solve

Traditional sportsbooks are principals: they set odds and take the other side of every bet. This means instant execution on any combination of props you want to parlay. Want to bet that Travis Kelce scores a touchdown AND the Chiefs cover the 7-point spread? All the major operators can offer you odds on that instantly and prediction markets may as well with pre-packaged parlays. But what about less common parlays, like: KC -7, Kelce TD, Chris Jones 2+ sacks, and a Mahomes interception?

Prediction markets are exchanges, meaning they match buyers with sellers. Kalshi’s parlay product uses a “request for quotation” model where your custom parlay gets sent out to market makers who decide whether to offer odds.

Think about the combinatorial math: a typical NFL game might have 50+ prop markets. The number of possible 3-leg parlays is 50 × 49 × 48 = 117,600 combinations. For 4-leg parlays? Over 5 million combinations. No market maker is going to provide continuous two-sided liquidity on millions of permutations for every game.

The result? On Kalshi, you wait for a quote that may never come, or you get wider spreads that eliminate the supposed “better odds” advantage. On DraftKings, you click and bet.

This isn’t a technology gap that can be closed with more capital. It’s a structural difference in business models. Being a principal costs more (you bear the risk), but it enables product experiences that exchanges simply cannot match.

The Catalyst: Prediction Markets Will Accelerate State Legalization

This is the contrarian insight: prediction markets aren’t a threat to state legalization, they are the catalyst that finally breaks the logjam in California, Texas, and Georgia.

Consider the political math: State legislators in these markets have been able to kick the can because their constituents had no legal alternative. That’s no longer true. Kalshi, Robinhood, Polymarket, and now DraftKings Predictions and FanDuel Predicts are offering sports event contracts to residents of California, Texas, and Georgia today, with zero tax revenue flowing to state coffers.

The political dynamic has flipped. Before prediction markets, the question was: “Do we want to legalize gambling?” Now the question is: “Do we want to regulate and tax gambling that’s already happening, or cede the market to federal exchanges?”

This is exactly what happened with daily fantasy sports (DFS) in 2015. States rushed to regulate DFS precisely because FanDuel and DraftKings were already operating there. Prediction markets are DFS 2.0, the unregulated activity that forces legislative action. However, this comes amid legal pushback, with at least 9-12 states issuing cease-and-desist orders or lawsuits against platforms like Kalshi, arguing they violate state gambling laws.

DraftKings and FanDuel Are Playing Both Sides

Here’s what the market is missing about DraftKings’ and FanDuel’s prediction market launches: they’re not abandoning their sportsbooks, they’re creating an on-ramp for future customers.

DraftKings Predictions launched on December 19, 2025, in 38 states, including California, Texas, and Georgia. FanDuel Predicts launched on December 22, 2025, initially in five states with a phased national rollout through early 2026. Users in non-legalized states will download the apps, create accounts, deposit funds, and start betting on event contracts. When those states eventually legalize traditional sports betting, DraftKings and FanDuel already have the customer relationships, apps installed, and payment credentials on file.

This is the daily fantasy playbook all over again. DFS was never a great standalone business—it was a customer acquisition channel for sports betting. Prediction markets are the new DFS: a way to build brand awareness and customer databases in non-legal states.

Valuation: Paying for a Problem That May Not Exist

DraftKings trades at roughly 18x 2026 while Flutter trades at 12x multiple on 2026 adjusted EBITDA, respectively. DKNG is a pure play on the US sports betting and iGaming market while FLUT has a broad geographic composition. Both stocks are down 25-30% from their recent highs on prediction market fears.

But the prediction market “threat” is being priced as if:

• Kalshi can replicate the full sportsbook product experience (they can’t—see parlays).
• States will never legalize (the opposite is more likely now).
• DraftKings and FanDuel will lose customers (they’re still growing).
• The regulatory environment will remain favorable to prediction markets (multiple states are suing, and legal battles are ongoing).

The asymmetry here is favorable. If prediction markets are banned or restricted, these stocks re-rate higher immediately. If prediction markets succeed in forcing California/Texas legalization, DraftKings and FanDuel get access to 70 million new customers. If the status quo persists, both companies continue growing their existing markets while building customer bases via their own prediction market products.

The Bottom Line

Wall Street is pricing DraftKings and FanDuel as if prediction markets are an existential threat. The reality is more nuanced: prediction markets are structurally unable to compete on the highest-margin products (parlays), they’re creating political pressure that will accelerate state legalization, and the incumbents are already adapting by launching their own prediction offerings.