Why This Battered Boston-Based Betting Stock Can Bounce Back

Investors paying attention to sports betting stocks these days are likely aware the industry has caught a virus known as "Prediction Markets Flu." Down 22.6% for the month ended Oct. 21, DraftKings (NASDAQ: DKNG), one of the largest operators in the space, proves as much.

The prediction markets tale of woe incurred by DraftKings and friends started in earnest in late September amid reports that turnover on Kalshi -- one of the biggest yes/no prediction exchanges -- soared to record highs, exceeding totals seen just prior to Election Day 2024. Meanwhile, September brings the early portion of the college football and NFL seasons, and football is the most wagered-on sport in the U.S.

Combine those factors with DraftKings and other sports betting stocks previously displaying favorable seasonality around football season, and investors were right to wonder, "What the heck is going on with DraftKings?" Those concerns hold clues as to why DraftKings is a viable rebound candidate.

Prediction market concerns overstated

Invest long enough and you will hear terms like "panic selling" and folksy wisdom such as "stocks fall faster than they rise." Both are relevant in discussing DraftKings' recent price action as the stock sold off on reports of Kalshi's soaring football contract volume. To borrow another market pearl of wisdom, they may have "thrown the baby out with the bathwater" without fully understanding the scenario.

DraftKings could be a rebound candidate as prediction market fears abate. (Image source: Getty Images)

What sports betting equity investors may have gotten wrong regarding Kalshi volume is that turnover on the exchange isn't comparable to a sports wagering handle. Handle pertains to the total amount of money bet on an event, whereas volume on a prediction market represents buy and sell orders.

In fact, in the wake of the DraftKings drubbing, at least one analyst argued that media reports assessing Kalshi's volume surge didn't take into account the possibility of that company potentially counting both sides of trades, thus making its volume numbers highly unlike a sportsbook's handle. Interestingly, that argument was framed in the context of the prediction markets drama representing a buying opportunity in stocks like DraftKings.

Then there's the matter of parlays -- long odds, multi-leg wagers that bettors love due to the lottery ticket feel. Sportsbooks like DraftKings love parlays, too, because bettors rarely cash those tickets meaning those bets are profit boosters for gaming companies. Yes, Kalshi and other comparable exchanges are offering football parlays, including those of the same-game variety, but word on the street is that those offerings leave a lot to be desired relative to DraftKings' parlay menu.

Add it all up, and it's not surprising that some analysts maintain the view that prediction exchanges aren't competitive threats to established sportsbook operators. Those are strong points in favor of a possible rebound by the stock.

Speaking of a rebound...

Another reason DraftKings has been in a funk is because some investors interpreted the company as sitting idly by while prediction markets ate its lunch. The Beantown-based gaming operator allayed those concerns late Tuesday of last week, announcing the acquisition of upstart prediction market Railbird Exchange. Judging by the stock's 4.4% jump in after-hours trading Tuesday, investors like the news.

That could be a foundation on which a rebound is built because while the Railbird buy isn't the biggest deal in gaming industry history -- terms weren't even disclosed -- it shows that DraftKings is responsive to competitive threats and willing to push into new arenas when needed. That might be enough to restore investors' confidence.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.