DraftKings (DKNG.US) Has Profits "Siphoned Away" by Prediction Markets; Quarterly Loss Exceeds Expectations by 5x; Goldman Sachs Group, Inc. and Other Wall Street Institutions Slash Price Targets Across the Board

DraftKings (DKNG.US), a U.S. domestic sports betting operator, saw its shares plunge last Friday, the core of which can be described as the customer value promised by prediction market expansion still awaiting realization, while profit pressure has already entered the company's financial reports ahead of schedule. The stock rose about 10.1% in October and still gained 1.77% on November 5 amid a tech stock selloff; but after the earnings report and conference call, the stock fell 21.3% to $18.51 as of the November 6 U.S. market close, while the Nasdaq 100 and Philadelphia Semiconductor Index rebounded 1.35% and 4.21% respectively the same day, indicating the selling pressure came mainly from the company's own earnings expectation reset. Financial data shows DraftKings' third-quarter revenue grew 16%, but the scale expansion of prediction markets such as Polymarket and increased promotional spending in the online casino business caused revenue, profit and subsequent guidance to fall short of expectations. Goldman Sachs Group, Inc.'s November 8 research report remained bullish on the operating efficiency of the core business and the long-term expansion space of prediction markets, maintaining a "Buy" rating, but cut its 12-month target price from $34 to $26, a 23.5% reduction; compared with the $18.51 closing price, this implies about 40.5% potential upside, corresponding to a market value of approximately $12.96 billion based on the existing share count on a static basis. This latest target price cut also reflects Goldman Sachs Group, Inc.'s trade-offacknowledging DraftKings' long-term growth opportunity while reducing the valuation it is willing to pay for the uncertainty of profit realization. Customers Are Still Growing, but Profits Are Being Consumed Ahead of Schedule: Prediction Markets Rewrite the Pace of Profit Release The first contradiction Goldman Sachs Group, Inc. focuses on is the clear disconnect between user growth and current-period profit. Third-quarter revenue was $1.329 billion, below the market expectation of $1.387 billion listed in the research report; adjusted EBITDA loss was approximately $317 million, while the market had originally expected a loss of approximately $60 million. However, the core sports betting business's net revenue growth of 36% and handle growth of 12% do not support the judgment that "the traditional business has been comprehensively eroded by prediction markets such as Polymarket." The online casino business (iGaming) added 76% new customers, but net revenue grew only about 2%, indicating that customer acquisition promotions are suppressing current-period revenue conversion. On the earnings call, management further explained that about 60% of the gap in the full-year profit expectation cut for the core business came from sports outcomes favorable to customers, with the remainder mainly from iGaming customer acquisition investment. The second contradiction is that profits generated by the core business are funding new business expansion. The company cut its 2026 revenue guidance to $6.35 billion$6.55 billion and adjusted EBITDA to a profit of $175 million$275 million. Breaking down the midpoint, the core business contributes approximately $900 million in profit, minus approximately $675 million in net EBITDA drag from prediction markets, leaving approximately $225 million; the "investment" here is a net drag on an earnings basis, not data-center-style capital expenditure. For 2027, the company expects revenue of $7.35 billion$7.75 billion and adjusted EBITDA of $800 million$1 billion: the midpoint is equivalent to $1.2 billion for the core business, minus $300 million in prediction market losses. From this, the 2027 profit recovery depends both on increased profit from the core business and on narrowing losses in the prediction market business, which has not yet entered a phase of full profitability. Goldman Sachs Group, Inc. Keeps "Buy" but Cuts Both Earnings and Multiple: Re-rating Depends on Customer Payback The key to Goldman Sachs Group, Inc. maintaining its positive judgment is that prediction markets have already shown customer economics worth tracking: more than 1.6 million customers participated during the year, retention performance is close to that of sports betting, and customers acquired in 2026 are expected to pay back acquisition costs in about 20 months, better than the two-year target. However, the payback period is a management estimate, and revenue recognition and profit realization still require time. The conference call revealed that prediction market marketing spending may still increase slightly in 2027, with loss narrowing mainly relying on existing customers generating more gross profit rather than simply cutting promotional budgets. Accordingly, Goldman Sachs Group, Inc. retained its long-term growth judgment while cutting its fourth-quarter adjusted EBITDA forecast by 60% to $226 million and its 2027 and 2028 forecasts by 21% and 18% respectively to $906 million and $1.306 billion; among these, the 2027 revenue forecast was cut by only about 1%, indicating that this re-rating mainly occurs at the level of how much cost growth requires and how long it takes to convert into profit. Its free cash flow forecasts reflect the same pace: an outflow of approximately $181 million in 2026, turning to inflows of approximately $534 million and $902 million in 2027 and 2028 respectively. The target price adjustment further reflects this caution. Goldman Sachs Group, Inc. uses a methodology weighting revenue valuation and discounted forward earnings at 50% each: the revenue side maintains 2x EV/revenue, while the earnings side cuts the forward EV/GAAP EBITDA multiple from 13x to 10x, discounted back three years at a 12% discount rate. In other words, the $26 target price incorporates both earnings forecast cuts and valuation multiple compression; the 12% discount rate was not raised. In addition, Goldman Sachs Group, Inc.'s research report gives downside, base and upside scenarios of $13, $26 and $32 respectively, corresponding to approximately 29.8%, +40.5% and +72.9% versus $18.51. What determines which end the valuation moves toward is customer retention after promotional pullback, core business cost efficiency, and the impact of sports event contract regulation, new state legalization, gaming taxes and marketing restrictions on customer acquisition returns. How Big Is the Prediction Market Impact? Competing for Customer Entry Points, Hitting Profit Release First DraftKings' main businesses include Online Sports Betting, online casino, Daily Fantasy Sports, and lottery-related services and an increased push into the expanding prediction market. The economic model of sports betting is determined jointly by betting volume, odds, outcomes and product mix: handle minus payouts forms gross gaming revenue, then minus customer promotions forms net revenue, after which gaming taxes, payment, data and operating costs must still be borne. Therefore, handle growth does not automatically equal synchronous profit growth; product mix such as parlays, pricing power and promotional intensity all change how much revenue each dollar of betting ultimately leaves behind. The company's disclosed "sports consumer transaction volume" also includes prediction market transactions and cannot be fully equated with traditional Sportsbook handle. Prediction markets such as Polymarket organize demand through tradable event contracts, with the platform earning revenue from brokerage, exchange and related market-making businesses, and their competitiveness depends on user scale, contract richness, trading liquidity and customer acquisition efficiency. The impact on DraftKings includes both continued diversion of potential customers and renewed investment to protect customer entry points. The company can leverage its brand, customer base and cross-selling to expand new businesses, but these advantages need to be proven through customer retention and payback. At this stage, core sports betting is still growing, and it cannot yet be asserted that prediction markets have severely damaged its main business; what has clearly happened is that the profit the company would have gradually released is being reinvested into a new round of customer competition. What Goldman Sachs Group, Inc. is betting on is that these customers will continue to contribute revenue in the future, gradually amortizing current acquisition costs, rather than that greater trading volume will necessarily mean greater profitability. Prediction markets such as Kalshi and Polymarket have become globally popular since the U.S. presidential election in late 2024, when almost everyone was keen to bet real money on Polymarket, a paid prediction market platform, on who would win the U.S. presidential election between Trump and Harris, meaning the "bet on everything" trend began to sweep through financial markets. Iran war-related bets even pushed PolymarketGEO Group Inc political contracts to record highs, highlighting that prediction markets present a "bet on everything" trend while rapidly touching regulatory and ethical red lines. Wall Street Still Willing to Be Bullish, but the Trading Price It Is Willing to Pay Has Clearly Fallen After the earnings release, Wall Street institutions generally retained positive ratings on DraftKings but cut target prices one after another, reflecting that long-term growth opportunities are still recognized while uncertainty over near-term profit realization is depressing valuations. The following potential upside figures are all based on the November 6 closing price of $18.51, and target-price market values are estimated assuming approximately 498.3 million existing Class A common shares remain unchanged. Bank of America Corp maintained a "Buy" rating and cut its target price from $27 to $23, corresponding to approximately 24.3% potential upside and approximately $11.46 billion in market value. The bank believes the reset in the company's 2027 earnings expectations was larger than anticipated, sports event contracts still face regulatory risk, and large-scale promotional investment has heightened investor concerns about profitability, necessitating stricter spending controls. BMO Capital maintained an "Outperform" rating but sharply cut its target price from $50 to $26, focusing on revenue shortfalls across businesses and the erosion of profit by expansion investment; Truist likewise focused on the widening quarterly loss and the cut in full-year guidance but maintained a "Buy" rating and a $26 target price. The latter two institutions' target prices both correspond to approximately 40.5% potential upside and approximately $12.96 billion in market value. Jefferies and Macquarie also chose to retain positive ratings while cutting target prices. Jefferies maintained "Buy" and cut its target price from $44 to $28; Macquarie maintained "Outperform" and cut its target price from $34 to $28, both corresponding to approximately 51.3% potential upside and approximately $13.95 billion in market value. Jefferies believes the magnitude of the guidance adjustment exceeding expectations is an important reason for the stock pressure, and the prediction market economic model may still change over the next two years; but U.S. digital gaming demand remains underdeveloped, and DraftKings' ability to attract customers through product innovation and achieve profitable customer acquisition still supports long-term growth. Adjustments by other institutions reflect similar trade-offs. Canaccord Genuity maintained "Buy" and cut its target price from $40 to $30, corresponding to approximately 62.1% potential upside and approximately $14.95 billion in market value; Barclays maintained "Overweight" and cut its target price from $34 to $27, corresponding to approximately 45.9% potential upside and approximately $13.45 billion in market value; Freedom Capital maintained "Buy" and cut its target price from $28.50 to $25, corresponding to approximately 35.1% potential upside and approximately $12.46 billion in market value. These adjustments show that institutions still believe there is room for the stock price to recover, but have adopted more cautious pricing regarding how much profit prediction market expansion can contribute and when it will be realized.