DraftKings, Caesars investors weigh Kalshi & Polymarket risks

00:03 Speaker A

Sports betting stocks have been under pressure over the past month; Prediction markets caught the attention of investors and saw their valuations balloon within a few months. The New York Times reported Friday that Kashi had raised $300 million at a $5 billion valuation. This comes after Polymarket received a $2 billion investment from the owner of the NYSE at a valuation of $8 billion. Jed Kelly, Oppenheimer’s managing director of equity research for consumer internet companies, including sports betting companies, is here to better discuss the risks to sports from these prediction markets. Jed, thanks for being here.

00:46 jed kelly

Thank you for accepting me.

00:47 Speaker A

So, there’s a really interesting dynamic developing here between the more established sports betting companies and the prediction market companies, but of course there’s some overlap because some sports betting companies also have prediction markets. So how do you think about the two sides and what the competitive landscape will look like?

01:13 jed kelly

Yes, I think they essentially offer two different products. I think if you look at traditional sportsbooks, fanDuel and DraftKings offer better markets, more options. and then when you start looking at prediction markets, shi and Polymarkets, Polymarket, you see their offerings are a little bit more limited. and the other difference is obviously Polymarket and Kalshi, they’re being sued under the CFTC for now, so they’re proposing this at the federal level. I guess what happens, what happens to legality? Will prediction markets be available to everyone involved in sports in six months or 12 months, or will some of the state lawsuits we’ve seen with tribes in Nevada, Maryland or Massachusetts and California gain some traction?

02:18 Speaker A

In other words, although prediction markets are available nationwide now because they are regulated by the CFTC, that may not be the case six months from now or when these lawsuits continue.

02:34 jed kelly

That’s right, because what Kashi is using now is that you can’t play games under the CFTC. But they say sports are not part of the game. States think they control the games, right? So, a dilemma arises as to what will ultimately prevail. I think the general consensus among the investors we’re talking to now is that Kashi and Polymarket can offer sports contracts for the next three years. Something might happen sooner. It’s very difficult to guess. Currently, interestingly, Polymarket currently has a 40% chance of sports contracts falling under the CFTC which may not be available until the end of the year. So there are a lot of moving parts. For investors in DraftKings and Flutter, I think stocks are down further, mostly due to not hitting their September target. If September had lived up to expectations, I think these stocks would have been closer to where they were trading before Labor Day. That’s why I think it creates so much noise. I haven’t seen any of them, we haven’t seen anything from a product, from a pricing perspective, that would make us think they’re going to take share. At the end of the day, these are more likely to be different products. And I’m sure when the VCs and Ice invested in Polymarket and Kalshi their hopes were 5-10 years down the road and sports was less of a part of their business.