DKNG 3.31.26

That's what DraftKings and Flutter tried to pitch in the initial wake of this. They tried to say, "This will make states regulate faster." I don't know if I ever believed that, and there's no movement there. A good financial crisis might get us some movement, particularly on the iGaming side, if states are scrambling for sources of revenue.

And it's also the split between VIP and mass as well. That's another piece of it. There are many reasons VIPs won't move so fast. On the one hand, if you're a super sharp VIP who's only doing straight bets and is trying to make money, you'll move to Kalshi for even 10% better odds or more liquidity. But many people, especially on VIP, are high-risk, high-denomination bettors, and they get pared back quickly or limited out at DraftKings and FanDuel. So the more valuable VIPs are those who either lose on straight bets or play parlays and lose, and they're motivated by things that aren't necessarily financial. They have relationships, perks, suites, and parties around the Super Bowl and the NCAA. You even see it with Fanatics plucking off some share in big chunks in various states at certain times from DraftKings and FanDuel.

I think it's related to the fact that Fanatics, with Michael Rubin (CEO), has some very interesting cards to play with VIP experiences. That's the one place where they have a competitive advantage, and you see that movement. So it's either sharps doing straight betting that are most likely to move, and people in California and Texas getting to come to the space for the first time through Kalshi or Polymarket. Right now it's all Kalshi. Kalshi is enjoying a first-mover advantage in the unregulated states. People's habits are well formed, and other than these people who are truly trying to make money, which aren’t the most profitable clients, there's not a lot of reason to leave FanDuel or DraftKings if you're in New York, Michigan, or Ohio.

I understand that much of their business comes from unregulated states. So there's an opportunity cost to FanDuel and DraftKings if they can't get into those markets soon enough. The question is, how late is too late for them to enter? On the one hand, Kalshi had been making a big splash for about a year. Polymarket has less time. You've got crypto and Robinhood (HOOD), a bunch of people all trying for it. Kalshi is the only one that's got any scale. You can make the argument that, at a certain point, habits are fixed, and it'll be hard to dislodge people. But if you look at the history of how regulated markets developed, FanDuel held a leadership position, which DraftKings eroded over the past few years, starting when they closed the product loop. So, with a superior product within the first few years, there's precedent for switching or at least being polyamorous with these apps, to the extent that companies can come up the product, customer experience, and user interface curve. The question is, can FanDuel and DraftKings get there? If they can get there by this football season, they could take meaningful market share from California and Texas.

These stocks are priced as if they won't get any opportunities in unregulated states and will be cannibalized in regulated markets. It's not being contemplated at all what would happen if they were able to get meaningful share in the unregulated states. A huge amount of TAM has opened up due to the current CFTC’s (Commodity Futures Trading Commission) stance, allowing prediction markets to operate in California, Texas, and Florida, which were states they were previously locked out of. They still have big brands, DFS (daily fantasy sports) user bases, and all the things that give them a running head start as states opened from 2018 to 2020. But even now, when states open, like Missouri, they move quickly to the front of the market. If you're somewhere in a state where you could drive to another state that's regulated, people have already downloaded the apps. They're at a scale where they can do national advertising. They've got super high brand awareness and brand trust.

So they have a lot going for them in prediction markets if they can get their product up to snuff, but it isn't yet. But to count them out is premature, given what development organizations they've proven to be. In the case of Flutter, it operates the world's largest prediction market on Betfair. That's mostly about soccer, cricket, and tennis. They need to adapt that to American football, baseball, hockey, and basketball. But if they can get that going by the end of the year and have a robust product for football season, they could have a shot at getting a big piece of the sports market in California, Texas, and Florida.

It's unclear to me whether the non-sporting market will continue to exist in the same way it does now, given so much insider trading on everything from military actions to the Bad Bunny halftime show. Either it gets regulated and prosecuted, or consumers realize they're being picked off. By the third time, maybe people will stop being suckers for these events where people do have perfect information.

Part of what got the market to find religion on this is that the MGMs (MGM) and Caesars (CZR) of the world were told by their shareholders to stop. You don't have irrational small players fighting for share. Fanatics and bet365 can do whatever they want since they're private. But bet365 has been the most disciplined with the most cash. Fanatics has had its moments, but it's been disciplined lately. So that's the risk with Kalshi and Polymarket. You're back into this Wild West, where you have an unregulated player. EBITDA growth will be very strong, but it's less than it would have been. There may be downside risk between tech development and marketing costs. But if you had EBITDA at DraftKings come in at $550 million instead of $850 this year, versus last year, around $300. If there was downside because they were taking meaningful share in prediction markets in California and Texas, that would be positive for the stock.

Well, they guided to 6.5%-6.9%. So 6.7%, and they did about 6% last year. So you're growing at 12%. And then if you backed out Missouri, you're probably looking at high single digits. That's where the market is at right now, and that's part of why the stocks are down.

It was 15% to 20% growth for years to come. I think that dream is dead. But the question is, what do you value a high-single-digit top-line grower with the potential for very healthy EBITDA margins and EBITDA expansion in a strong duopoly? You have two players consolidating share into the 75%-80% range, and their combined share has only been rising by a percent or two each year. If it were some other industry, if I just described high single-digit growth, 10% EBITDA margins potentially heading to 20%, and two players who control 80% of the market, and nobody's been able to take prediction markets out of it, what do you think that would trade at?

Yes, or you've got a 10% EBITDA margin going to a 20% EBITDA margin. You'll grow revenue by 7%, but you could grow EBITDA 15% for a long time. That's a 15x EBITDA business.

Yes, I would normally compare it to a SaaS company. Two things are going on. If it were just a slowing of the market, you would have a compounder that's growing 15%, and it would look like a SaaS business. Now, everyone hates SaaS too, but this kind of technology-driven oligopoly market leader with double-digit long-term EBITDA compounding growth, that's a 15x EBITDA business easily. We basically have that here. Part of it is prediction markets, and part of it is the market slowing. Going from 30x to 15x EBITDA is your market slowing. Anything below 15x is the existential threat of prediction markets. It's looking at the glass as half-empty rather than half-full, given that the prediction markets have doubled the TAM. Now, incremental revenue might be a little lower because it's an agency market rather than a principal market, but after adjusting for gaming taxes, it's likely to be as profitable, if not more profitable.