GLOBAL ONLINE GAMING : CFTC issues draft Prediction Market rules - thoughts

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GLOBAL ONLINE GAMING : CFTC issues draft Prediction Market rules - thoughts

Refinitiv

Investment case, valuation and risks

DraftKings (Underperform, Target Price USD20)

Investment case

DraftKings is the leading pure-play on the US & Canadian online sportsbetting &

iGaming markets, benefitting from progressive state level legalisation & player

adoption. However, the aggressive expansion of Federally regulated prediction

markets like Kalshi into sports looks set to significantly dampen growth and moderate

margin expansion on lower leverage and more need to reinvest in customer acquisition

& retention. Whilst prediction markets may eventually be curtailed in sports by legal

challenge or legislative change this is a likely 1-3 years away. Meanwhile wider US

political sentiment on gambling is becoming less supportive and could lead to slower

progress in further state legalisation, whilst existing states may increase restrictions

and tax rates. We see downside risks to consensus whilst, even allowing for future

realisation of >$1bn tax shield on prior years' losses, our DCF-based target points to

downside. Underperform.

Valuation methodology

We use DCF to value DraftKings including 14.2% WACC, 2% nominal TGR.

Risks

To the upside:

Negative newsflow for Prediction Markets (to the benefit of regulated sportsbetting), such

as adverse legal rulings or regulatory or legislative progress in restricting PM's from

sports events; faster legalisation of online sportsbetting or iGaming across US states

than we allow for; greater success in DraftKings' own PM offering than we anticipate;

better operating leverage than we allow for

To the downside:

Continued unfettered share gains by Prediction Market players in sports gambling at the