Bank of America's Gambling Stock Downgrade: A Prediction Market Payout?
Bank of America threw a curveball this week, downgrading DraftKings and Flutter Entertainment (FanDuel's parent company). The reasoning? Prediction markets like Polymarket are muscling in on the online sports betting scene, and regulatory headwinds are picking up. The move sent ripples through the gambling sector, but is it a justified bet? Let's dissect the data.
The Prediction Market Play
BofA's analysts, led by Shaun Kelly, are flagging Polymarket's potential return to the US market as a major disruptor. Polymarket, and others like Kalshi, operate on a different model than traditional sportsbooks. Instead of betting on whether a team will win or lose, users trade contracts based on the probability of an event occurring. This allows for a more nuanced and potentially more accurate reflection of market sentiment.
The bank points to low barriers to entry and substantial fundraising valuations for these prediction markets. This influx of capital could fuel aggressive marketing and, crucially, lower fees. BofA notes that Polymarket operates internationally with zero fees. Can DraftKings and Flutter compete with that? Strategically, it feels like a race to the bottom. BofA's downgrade of gambling stocks, citing the threat from prediction markets, was recently covered by Bank of America downgrades gambling stocks, citing threat from prediction markets. The bank cut its rating for DraftKings and Flutter from buy to hold and slashed its price targets for the stocks by 23% and 27%, respectively.
What's unclear is the actual user overlap between traditional sportsbooks and prediction markets. Are these truly the same customers? My analysis suggests that prediction markets might attract a different demographic: individuals more interested in speculation and hedging than simply betting on their favorite team. And this is the part of the report that I find genuinely puzzling: what's the actual data on customer acquisition cost for prediction markets versus traditional sportsbooks? Without that, it's hard to quantify the threat.
Regulatory Roadblocks and State-Level Pushback
The other half of BofA's argument revolves around regulatory uncertainty. They argue that the legal landscape for online sports betting is complex and unlikely to be resolved until mid-2026. At least five states (NV, IL, OH, MI, and AZ) have already warned online sports betting and gaming operators about entering prediction markets.
This state-level pushback is significant. BofA analysts wrote, "While Federal and State cases work through the courts, state regulators including NV, IL, OH, MI, and AZ are seemingly boxing-in the incumbent operators, handing an advantage to disruptors and new entrants."
But here's where the narrative gets a bit murky. Are these states specifically targeting prediction markets, or are they simply trying to protect their existing sports betting revenue streams? The report doesn't clarify whether the "consequences" states warned about are related to existing regulations, or newly created ones that specifically target prediction markets. This distinction matters.
The Long-Term Bet
BofA now has a price of $250 per share for Flutter, suggesting 8% upside from Monday's close. It sees DraftKings hitting $35 per share, indicating about a 14% gain from current levels. These numbers suggest that while the bank sees headwinds, it's not predicting a complete collapse.
The key question is whether DraftKings and Flutter can adapt. Can they integrate prediction market elements into their existing platforms? Or will they be forced to cede market share to these new entrants? The answer likely depends on their ability to navigate the regulatory landscape and innovate their product offerings.
A Premature Fold?
BofA's downgrade is a calculated risk. While prediction markets undoubtedly pose a threat, and regulatory hurdles are real, declaring the end of the online sports betting boom feels premature. The incumbents aren't going down without a fight, and the game is far from over.
