Investor sentiment towards US-exposed bookmakers such as Flutter Entertainment PLC (LSE:FLTR, NYSE:FLUT), Draftkings Inc (NASDAQ:DKNG) Entain PLC (LSE:ENT) is currently dominated by "caution and fear" due to the rise of prediction markets.
This was one of the key takes from the Berenberg leisure analysts after a trip to the US, where they encountered “the most concern and fear we have felt since 2022” due to the fast-developing prediction market space and a fear that it will eat the lunch of the sports betting and iGaming industry.
For the uninitiated, prediction markets let users bet on real-world events from the outcome of local elections to economic data or more outlandish bets on whether Trump would smoke marijuana with Joe Rogan or whether the US government will confirm the existence of aliens.
The biggest platform is privately owned Polymarket, while Robinhood Markets Inc (NASDAQ:HOOD) launched prediction markets products a year ago and its CEO said on its earnings call this week that it was "on fire" with volumes doubling each quarter.
Trump Media & Technology Group Corp (NASDAQ:DJT) announced this week that it will make prediction markets available on the Truth Social platform through an arrangement with Crypto.com, while traditional sportsbook operators like DraftKings are thought to be watching closely, though have not yet entered due to regulatory uncertainty.
Berenberg analyst Jack Cummings said almost every meeting with US investors was against the backdrop of new prediction markets newsflow, including Trump Media’s plans to enter the space.
"Most were very cautious about the threat of prediction markets, and while many agreed with risks being overstated, consensus view is that the products are here to stay and could present an overhang in the near term.
"We sensed that investors were the most cautious about DraftKings, given it is a pure-play, but investor concerns about Flutter Entertainment were the highest we have felt since 2022."
For the UK-exposed names, potential taxation increases were a topic of discussion, with many investors in agreement that share prices were "pricing in negative scenarios".
The market is cautious on the wider gaming space "for the first time in three to four years", given what the analyst called a "somewhat perfect storm" of various concerns, which has led investors to take a risk-off approach to the sector.
However, the current weakness in gaming shares is "an opportunity", the analyst said.