Draftkings Inc (NASDAQ:DKNG) shares have been volatile over the past month as investors continue to weigh the potential impact of prediction markets on the company’s growth outlook, according to Bank of America.
The analysts wrote that DraftKings shares have swung between an intraday low of $23.50 and a high of $30 since May, before easing back to around $25, or roughly 17% below recent highs. Shares were down another 4% at about $23.50 on Thursday.
They wrote that the move reflects a growing debate among investors around prediction market volumes, core sports betting trends, and valuation, particularly ahead of major sporting events.
The bank wrote that it has broken down the current “bull-bear” debate across prediction markets, DraftKings’ core business, and earnings outlook, while also raising its long-term prediction market total addressable market (TAM) estimate to $1.9 trillion in annual volume, up from a prior $1.3 trillion. Despite the higher TAM assumption, the firm made no changes to its earnings estimates and maintained a Neutral rating on the stock.
On prediction markets, Bank of America wrote that volumes have been accelerating, with DraftKings reporting annualized activity of about $3 billion in May, and projections suggesting that could rise to roughly $9 billion in June.
The analysts wrote that DraftKings’ market share has increased from around 1.3% in April to over 2% on certain days in June, and could potentially reach 5% to 10% by 2027 if product and marketing initiatives continue to scale. Under that scenario, the firm wrote that prediction markets could generate $500 million to $1 billion in revenue by 2027, with high incremental margins, though market-making activity could introduce additional upside volatility.
However, Bank of America also wrote that higher volumes may come with increased customer acquisition and promotional costs. The analysts estimate potential losses of $300 million to $550 million this year, above DraftKings’ current guidance of $200 million to $300 million.
They wrote that aggressive promotional activity, including offers such as “trade $5 get $200,” alongside lower fee economics and evolving market structure, could pressure near-term profitability until market-making scales further.
On the core business, Bank of America wrote that DraftKings continues to gain share in sports betting, supported by ongoing product improvements and marketing efficiency, with sports net gaming revenue now approaching parity with FanDuel.
At the same time, the analysts wrote that concerns remain around potential cannibalization from prediction markets, structural hold volatility following recent unfavorable sports outcomes, and softness in iGaming trends. They noted that iGaming has seen roughly 400 basis points of market share loss over the past 18 months, while gross gaming revenue growth slowed to low-single digits in the second quarter.