DraftKings pours money into the prediction market! Revenue forecast downgraded, stock plunges 15% after hours

According to the latest quarterly report, major sports betting platform DraftKings plans to expand its dedicated betting platform DraftKings Predictions within the next year. DraftKings has adjusted its fiscal year 2026 revenue forecast to $6.5 billion to $6.9 billion, a downward revision that caused the stock to fall 15% after hours.

38 States Expansion and Breakthrough in Illegal Betting States

Through a partnership with CEX, DraftKings Predictions has launched in 38 states, including California, Florida, Georgia, and Texas, where traditional sports betting is not legal. Reports indicate its core product has been rolled out in 26 states and Washington, D.C. This expansion strategy is highly savvy, leveraging the legal differences between prediction markets and traditional betting.

In the U.S., traditional sports betting is heavily regulated and only legal in certain states (mainly Nevada, New Jersey, etc.). Large states like California and Texas prohibit sports betting, preventing companies like DraftKings from operating their core business there. However, prediction markets are classified as “event contracts” rather than “gambling,” and are regulated by the CFTC rather than state gaming commissions. This regulatory arbitrage allows DraftKings to offer prediction products in states where betting is banned.

Covering 38 states means DraftKings Predictions reaches about 80% of the U.S. population. Major markets like California (40 million), Texas (30 million), and Florida (22 million) offer enormous growth potential. Converting just 1-2% of these populations into active users could mean hundreds of thousands to millions of new users.

DraftKings’ Dual-Track Strategy

Core product (sports betting): 26 states + D.C., regulated by state betting laws

Predictions (prediction markets): 38 states, regulated by CFTC, covering states where betting is prohibited

Expansion logic: Use prediction markets to bypass state betting bans and access larger markets

However, the sustainability of this regulatory arbitrage is questionable. Earlier Thursday, SEC Chairman Paul Atkins called prediction markets a “significant issue” of concern for regulators. While he is SEC Chair and not directly overseeing CFTC-regulated prediction markets, his statement indicates increasing federal concern. If in the future states pass laws explicitly banning prediction markets (as Nevada has done), DraftKings’ expansion into 38 states could face legal challenges.

$6.9 Billion Revenue Target vs. 15% Stock Drop

DraftKings has revised its 2026 revenue forecast downward to $6.5 billion–$6.9 billion, partly due to “anticipated investments in DraftKings Predictions, launching services in target markets, and prudent planning amid changing business conditions.” This revision caused the stock to drop 15% after hours.

Lowering from previous expectations (possibly around $7–$7.5 billion) to $6.5–$6.9 billion, while not a drastic cut, is viewed negatively in the current market environment. Investors focus less on absolute numbers and more on trend direction. The downward revision signals waning confidence in future growth, possibly due to increased competition, regulatory pressures, or market saturation. The 15% after-hours decline reflects strong market disappointment.

Paradoxically, DraftKings emphasizes that “investment in Predictions” was a reason for the downward revision. This suggests the company is pouring substantial resources into developing and promoting prediction markets, which in the short term will erode profits (higher costs, revenues not yet realized). Investors may question: why allocate resources to an emerging, uncertain field when core betting operations still have growth potential? Is this a wise diversification or a strategic mistake?

If the $6.9 billion revenue target is achieved, DraftKings would solidify its position as one of the largest online betting platforms in the U.S. But the key issue is profit margins. Prediction markets may have lower margins than traditional betting (due to fiercer competition and higher tech investments). If revenue grows but profits decline, it’s not positive for shareholders. This could be a core reason for the 15% stock plunge.

Regulatory Risks and Intensifying Competition in Prediction Markets

Prediction markets unexpectedly surged during the 2024 U.S. election and quickly gained global traction. Leading companies like Kalshi and Polymarket continue expanding, with new entrants joining the competition. Although DraftKings is a traditional betting giant, it is a latecomer in the prediction market space and faces strong competition from early movers.

Polymarket built a strong brand during the 2024 election, with political predictions that even outperformed traditional polls, creating a narrative of “more accurate than polls” and earning significant user trust. Kalshi, as the first CFTC-approved prediction market, has a core compliance advantage. Coinbase-backed prediction markets leverage the largest compliant exchange in the U.S., with a large user base. In contrast, DraftKings’ advantage lies mainly in its sports betting brand and user base, but whether these users are willing to shift to prediction markets remains uncertain.

Thursday’s SEC Chairman Paul Atkins’ comments cast a shadow over the entire prediction market industry. While CFTC was more open to prediction markets during Trump’s administration, SEC and state regulators’ attitudes may differ. If prediction markets are reclassified as gambling and heavily restricted, DraftKings’ massive investments in Predictions could be lost. This regulatory uncertainty is a key reason investors are selling off DraftKings stock.

For DraftKings, prediction markets are a “necessary defensive strategy.” If competitors use prediction markets to steal potential users, DraftKings’ market share could be threatened. Therefore, even if prediction markets are unprofitable or even loss-making in the short term, investments are necessary to maintain competitiveness. This “defensive investment” is essential but implies short-term profit sacrifices, which explains the stock’s decline.