DraftKings has increased its investment in prediction markets for 2026 to $700 million, nearly tripling its previous commitment. This decision, revealed in the company’s third-quarter earnings letter, includes a scenario assessing potential financial impacts if sports event contracts cease before July 31, 2028.
In this downside model, DraftKings anticipates that a customer using the prediction markets will contribute just 20% of the gross profit as compared to regular sports contracts once those contracts end. This changes the expected payback period from 18 to 41 months.
The company aims to bolster revenue by diversifying into non-sports markets including Pick6 and Lottery, though approximately 80% of current prediction markets customers remain focused exclusively on sports betting.
CEO Jason Robins highlighted in the letter that even if the sports contracts expire in July 2028, the 2026 customer cohort would be fully recouped by then, while customers acquired in 2027 are forecasted to recover more than 50% of their investment before that date and should be fully paid back within four years sans sports contracts.
Robins projects considerable earnings from the new wave of prediction market customers in the next year and claims that this cohort is currently outperforming the expected paybacks over two years. He described the outcome regarding sports event contracts as a "win-win position" regardless of potential court rulings.
The company’s earnings call is scheduled for Friday morning. At the close of trading on Thursday, DraftKings stocks stood at $23.52 but fell to $17.81 in after-hours trading amidst a wider sell-off in the market.
Conversely, DraftKings has updated its guidance for 2026, predicting adjusted EBITDA to be between $175 million and $275 million, a significant reduction from previous projections. The expectation for adjusted EBITDA now stands at $650 million to $700 million primarily due to the amplified predictions investment, with core business projections lowered to $875 million to $925 million.
Marketing expenses surged to $605.7 million in the third quarter, a 68% increase year-over-year, more than double the spending of $322.5 million from the second quarter. DraftKings reported an adjusted EBITDA loss of $316.9 million, down 23.8% from last year.
The marketing escalation coincides with a rise in engagement with predictions, with over 1.6 million customers participating year-to-date, a significant jump from the 600,000 reported in August.
DraftKings outlines the underlying assumption of its no-sports scenario, predicting adjusted gross profit per customer would retreat to 20% of current levels post-August 2028. The adjusted model suggests customers from the 2027 cohort would take longer to pay back due to the lack of sports contracts, extending their payback time dramatically.
The date of July 2028 does not have a clear rationale within the report and occurs just after the conclusion of the upcoming U.S. Supreme Court term. Currently, New Jersey has asked the Supreme Court to review a decision from the Third Circuit regarding Kalshi, while the Ninth Circuit recently denied a rehearing request from Kalshi in relation to a Nevada case.
Moreover, this model does not account for potential upside, assuming no further legalization of online sports betting or iGaming, despite ongoing investments to expand these markets. The company also excluded $59.1 million in advocacy and legal expenses from the adjusted EBITDA figures that relate mainly to legislative attempts to legalize iGaming in various states.
As for non-sports trading, nearly 20% of prediction customers have engaged with this area. DraftKings reported that the volume generated by non-sports markets is comparable to that of sports. Notably, cryptocurrency trading is gaining traction and has recently approached a significant share of total consumer volume. The company plans to transfer crypto markets to its own exchange, DKeX, in the coming month.
DraftKings separately reports other revenues, which fell by 12.5% year-over-year to $84.5 million in the third quarter.
Additionally, the presentation shed light on the economics of prediction markets for the first time, revealing an 11.1% take rate on consumer volume and indicating that DraftKings retains 7.3% of this volume while third-party market makers get 3.8%. In October alone, the annualized volume traded soared to $56.8 billion, leading to significant consumer volume.
The third quarter saw a 76% year-over-year increase in iGaming customer acquisition, with gross revenues rising by 7%. However, net revenue only edged up by 2.1% to $460.9 million as DraftKings allocated considerable resources to promotional efforts to attract new customers.
DraftKings emphasized its commitment to maintaining its cash position at around $1.1 billion throughout this investment period. For fiscal year 2027, revenue forecasts range between $7.35 billion and $7.75 billion, with adjusted EBITDA projected at $800 million to $1 billion, which also includes key figures related to predictions revenue and investment.
