Both Flutter Entertainment (NYSE:FLUT) and DraftKings Inc (NASDAQ:DKNG) are ready to take on the competition of prediction markets.
Or is it already too late?
Flutter Announces Prediction Market
Flutter reported mixed third-quarter financial results on Wednesday. Its revenue missed analyst estimates, while earnings per share came in ahead of estimates.
Along with financial results, Flutter also announced the upcoming launch of a new app: FanDuel Predicts. The app offers event contracts on "global benchmarks and economic indicators" and sports outcomes in some states.
The launch is being done in partnership with CME Group (NASDAQ:CME), the world's largest derivatives marketplace.
A launch is expected in December with a new standalone mobile app for the prediction markets unit.
Bank of America Securities analyst Shaun C. Kelley is concerned about the large amount of spending Flutter plans to make going forward.
"We think the confluence of OSB competition, hold volatility and step function investment in PMs (prediction markets) validate our recent downgrade," Kelley said.
The analyst recently downgraded both DraftKings and Flutter for several reasons, including the competition from prediction markets. Kelley maintained a Neutral rating with a $250 price target on Flutter after earnings.
Kelley said the market for online sports betting companies could be tough to grow profitability. As a result, the large spending on its prediction market launch is a potential headwind.
Flutter expects to spend $45 million in the fourth quarter and between $200 million to $300 million in 2026. That’s higher than the analyst's original expectations.
"We think this step-up investment could be warranted given the TAM, but also confirms we are entering an investment phase."
Kelley said there is still the major risk of more prediction markets coming, including Polymarket re-entering the U.S. market.
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Cautious Approach
Unlike other prediction markets that offer event contracts on politics, financials, entertainment and sports in every state, Flutter and DraftKings are looking to roll things out cautiously.
The caution comes with several states warning sports betting companies about prediction markets and states that have legal sports betting already fighting against prediction market companies.
Flutter said its FanDuel Predicts app will offer sports outcome contracts only in "non-online sports betting states."
By doing this, Flutter is trying not to provoke things in states where it already has a license and is operating online sports betting. In states where online betting isn't legal, customers “not on tribal lands" will be able to trade sports contracts.
Among the potential event contracts being offered by FanDuel are prices of oil and gas, gold and cryptocurrencies along with economic indicators like GDP and CPI.
DraftKings also plans on launching a prediction market unit called DraftKings Prediction in the coming months. The company is also following a cautious approach.
DraftKings CEO Jason Robins said the company won't have their prediction market available to everyone.
"We aren't going to be in every state with sports, we won't even be in every state with non-sports, and I think we have a good sense of where the sensitivity areas are," Robins said during the company's earnings call.
Robins said prediction markets might not make a large impact in the states that already have online sports betting.
The current approach from both Flutter and DraftKings targets prediction markets mainly in the states that don't have online sports betting, hoping to not upset existing state regulation relationships.
This comes as the state of New York has a bill on the table, known as the ORACLE Act (Oversight and Regulation of Activity for Contracts Linked to Events Act) that could regulate prediction markets in the state and also limit what types of markets can be offered.
Under the act, event contracts on "catastrophic" events like wars, disasters and deaths would not be allowed, while athletic events would also not be allowed, giving a potential edge to the online sports betting companies that operate in the state.
For DraftKings and Flutter, the companies faced the decision of waiting too long to enter prediction markets and get left behind or make a move and potentially upset current relationships. The company's are leaning into number one, while walking a tightrope to not enter too far into number two.
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