Bernstein: Can prediction markets fill the profit gap as DraftKings and Flutter’s core businesses slow?

How much have the core businesses slowed?

Across the 12 states that have reported data for July through September, sports betting handle rose 28% year over year in July, driven by the World Cup, fell 5% in August and was flat in September; growth in gross online gaming revenue in New Jersey, Michigan and Connecticut slowed from nearly 20% to about 12%.
Bernstein cut its forecast for DraftKings’ year-over-year sports betting handle growth from about 10% to about 7%; event outcomes unfavorable to betting companies are expected to reduce its sports betting revenue by 200 million dollars in the second half of 2026, but promotional spending was 150 million to 200 million dollars lower than the firm expected.
The handle share of Flutter’s FanDuel has improved, and observable promotional activity is also below the firm’s expectations; however, online gaming is growing significantly more slowly than previously expected.

Platforms tracked by Bernstein recorded approximately 132 billion dollars in notional trading volume in October, up 63% from the previous month; volume on DraftKings’ exchange DKeX rose to about three times its September level. Notional volume is calculated at the face value of contracts, while revenue comes from trading fees and market-making profits.
Exchanges charge fees for trading contracts; DKeX’s combination contracts accounted for about 75% to 85% of recent notional trading volume, and its market-maker fee rate for combination contracts doubled from 2 November, increasing the monetization of these trades.
The firm expects DKeX’s notional trading volume to reach 6.45 billion dollars in December, up from 4.5 billion dollars in October; its base case uses recent average weekend and weekday volumes and assumes 20% growth in December from November. Volume fell from the previous week over Halloween weekend, an important constraint on this growth trajectory.

Bernstein expects the company to narrow its 2026 adjusted EBITDA guidance range to 600 million to 700 million dollars, below the low end of its original guidance but above the then-expected level of about 550 million dollars. The firm believes prediction market exchange fees and market-making profits can help support a result above 600 million dollars.
For 2027, the firm expects DraftKings to provide EBITDA guidance of about 1 billion dollars, excluding prediction market revenue; including fees and market-making gains and losses, it sees a path to about 1.25 billion dollars, above the market consensus of about 1.1 billion dollars.
Customer acquisition spending will offset some of the incremental gains: Bernstein’s gross profit forecast is above consensus, while its model includes 300 million dollars more in sales and marketing spending than consensus, concentrated mainly in the first half of 2027; the firm also expects benefits as the customers acquired in 2026 gradually mature.

Unlike DraftKings, which owns DKeX, Flutter primarily makes markets across different trading venues. Market-making in combination contracts requires rapid estimates of the probability of multiple events occurring together; Bernstein believes the two companies’ experience pricing sports parlays helps them participate in this business.
Bernstein expects Flutter to raise its 2026 market-making business target from 50 million dollars to 100 million dollars, and forecasts its 2027 market-making revenue at 400 million dollars. But trading venue fees will erode market-making returns: based on current rates and rebates estimated by the firm, the industry’s combination-contract market-making market in 2027 falls from 3.3 billion dollars before fees to 2.5 billion dollars after fees.
Competition, law and regulation remain constraints. The US Commodity Futures Trading Commission’s rules on conditions for market-making by exchange affiliates are still at the proposal stage; Bernstein also cut its EBITDA forecast for Flutter’s business outside the US because of its exit from Brazil and Italian gaming taxes.

Because of a weaker online gaming growth outlook, Bernstein cut its price target for DraftKings from 29 dollars to 27 dollars per share, maintaining its outperform rating; it cut its Flutter price target from 110 dollars to 100 dollars.
The firm expects Flutter’s group adjusted EBITDA in 2026 to fall 8% year over year, as pressure from weaker US margins is partly offset by improvement in international markets.