Optimism ‘moderate’ in face of bear market for online sports betting stocks, analyst says
Online sports betting and igaming stocks are down 35% this year, according to Jefferies Equity Research analyst David Katz.
Katz explained that “our optimism for 1Q26 reporting is only moderate.” The exception was Rush Street Interactive, which he expected to beat estimates and raise guidance. Firms on which Katz is still bullish, though, included DraftKings and Sportradar.
Given that the legal prospects for prediction markets in the US and their economic outlook remain unresolved, Katz wrote, myriad questions cloud the picture for various affected stocks. “Although there is no evident impact to existing operations for our covered stocks, the investment in predictions by [DraftKings] implies that there is,” Katz wrote, citing DraftKings’ 35.5% share-price plunge in 2026.
Sportradar was, he continued, seeking fortune outside its core OSB business, chasing prediction-market and igaming revenues. Its stock was down 34.9% since 1 January.
“RSI remains the sole operator with business model consistency, which bears out in its stock performance,” the analyst observed, pointing to its 8.5% appreciation over the past three and a 3.5 months. He repeated a “Buy” rating for the stock as well as a US$30 per share price target. He called RSI the “easiest to own.”
Katz credited Rush Street Interactive’s performance in North American and Latin American markets for his higher estimates of its first-quarter results. Katz predicted revenue of US$329 million and US$45 million in first-quarter cash flow. That was up from projected revenue of US$323 million and cash flow of US$42 million.
“Robust” was Katz’s word for Rush Street Interactive’s Latin American business. He expected the company’s ongoing concentration on igaming “to drive steadier results versus OSB, supported by strong execution from management.”
The Jefferies analyst also kept “Buy” markings on DraftKings and Sportradar. His price targets for their stocks were US$46 and US$30 per share, respectively.
DraftKings’ first-quarter handle was predicted by Katz to come in slightly below expectations. But higher hold percentages would mitigate that, resulting in a gross-gaming-revenue outperformance. He said the company’s generosity to players was “disciplined.”
Katz debited US$20 million from DraftKings’ cash-flow projections, reflective of the costs of launching in Arkansas. Even so, he felt that cash-flow guidance of US$700 million to US$900 million for 2026 was “conservative” and looked forward to an upward revision.
The analyst said his projections for Sportradar were not only unchanged but hewed to Wall Street’s consensus view. “We view the bear case of exposure to gray and black markets as overstated, with the former misunderstood and the latter unsupported … However, the establishment of positioning in predictions coupled with the pursuit of igaming have yet to be reflected in our estimates,” Katz wrote.
At the time of Katz’s 15 April report, DraftKings was trading at US$22.51 per share and Sportradar at US$16.14, both relatively half of Jefferies’ price targets. Rush Street was trading at US$21.43, closer to Katz’s US$30 per share goal.
David McKee is an award-winning journalist who has three decades of experience covering the gaming industry.
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The Backstory
Behind the market’s reset
Online betting stocks have dropped sharply this year, and the forces behind the pullback go beyond weak sentiment. Analysts point to a confluence of higher state taxes, the rapid but unresolved rise of prediction markets and a shift in customer behavior toward in-play wagering that changes revenue timing and volatility. Against that backdrop, Rush Street Interactive has stood out with steadier performance driven by igaming, while larger peers juggle expansion costs and regulatory uncertainty. The market is parsing which business models can convert product advantages into cash flow in a tougher policy environment, and which names are most exposed if legal or tax risks intensify.
Jefferies’ David Katz has been consistent on the drivers. He argues that recent tax hikes and the cost of entering event contracts will pressure near-term earnings, especially for DraftKings, while Rush Street’s focus on igaming should help it sidestep some volatility. He also sees Sportradar working to diversify beyond core data services. The common thread: higher resilience for operators leaning into igaming and in-play engagement, and more sensitivity for those carrying heavier exposure to high-handle, high-tax markets.
In-play momentum changes the playbook
One counterweight to bearishness has been an accelerating shift to proposition and in-play betting, which deepens engagement and can lift operator hold. Katz, in a Sept. 9 note, flagged “strengthening trends around in-play betting,” calling it a clear positive for DraftKings and infrastructure provider Sportradar. He cited a 10% sequential rise in in-play interest since the first quarter and broad adoption of parlays, with more than half of surveyed bettors placing single-game parlays and 43% trying multi-game versions. That growing appetite underpins expectations that operators with robust live markets could post better gross gaming revenue even if handle growth moderates. Read more in Jefferies’ assessment of in-play betting lifting DraftKings and Sportradar.
Product depth matters as state expansion slows. DraftKings’ acquisition of SimpleBet positions it to lead in micro-markets, Katz said, which could add a “new leg higher in handle” independent of new legalizations. Flutter’s FanDuel, with strong parlay penetration, is seen benefiting as well. The strategic implication is clear: operators that convert live betting enthusiasm into sustained higher hold can cushion earnings against regulatory costs and seasonality.
Tax headwinds force hard choices
The most immediate squeeze comes from state-level tax hikes and fee structures aimed at the largest operators. Illinois’ progressive handle tax is the flash point. Flutter moved to pass through some of the burden with a US$0.50 per-bet surcharge for FanDuel customers in the state beginning Sept. 1, a response the company said it would reverse if lawmakers repeal the levy. Jefferies expects DraftKings to mirror the move, noting both routinely exceed the top handle threshold. The analysis suggests customer fees will likely dent growth in Illinois but bolster cash flow with minimal implementation cost. Details are in Jefferies’ take on FanDuel’s Illinois user fee and its limited spillover risk.
Katz updated his models July 2 to reflect higher taxes in Illinois, Louisiana, New Jersey and Maryland, plus launch costs in Missouri and Alberta. He still projects DraftKings will generate strong cash flow for 2025 but trimmed late-2025 and 2026 estimates as taxes and event-contract investments bite. Conversely, he left Rush Street estimates largely unchanged, citing a net of tax effects, forex and solid igaming results. The firm’s diversified footprint in North and Latin America provides ballast. See the full breakdown in how higher taxes crimp DraftKings but spare Rush Street.
Igaming’s steadier lane
While sports betting absorbs higher levies and more volatile outcomes, igaming is gaining relative favor. Macquarie’s Chad Beynon wrote June 26 that igaming stocks have outpaced the S&P 500 by a three-to-one margin over the prior month, with sector optimism buoyed by elevated operator hold in June and faster growth in online casino. He expects most B2C online segments to outperform near term, naming DraftKings and Flutter among likely beneficiaries and underscoring Rush Street’s niche igaming following and diversified presence in Canada and Latin America. Read Macquarie’s view that igaming will outperform this year.
Macquarie estimates show handle growth accelerating from 11% in the first quarter of 2025 to 15% in the second, with igaming up roughly 30% in the same period. That surge, along with structurally higher hold and a pivot to in-play betting, could offset some cash flow drag from tax hikes in Illinois and New Jersey and new-market launch costs in Missouri. Longer term, the mix shift suggests operators with stronger igaming exposure and disciplined promotions may generate more consistent earnings, even if sports margins fluctuate with game results and customer behavior.
Prediction markets raise upside and risk
Event contracts have expanded rapidly but sit on contested legal ground. Katz warned April 1 that prediction markets, now enjoying “enforcement-light” oversight by the Commodity Futures Trading Commission, face rising court challenges and potential policy backlash in 2027. He contrasted the lighter regulatory and tax burden for event contracts with the stringent licensing and responsible-gambling regime for sports betting, adding that looser controls create political risk if player outcomes sour. The litigation path could reach the Supreme Court, and outcomes may hinge on which state case is heard. For the legal map and operator calculus, see Jefferies’ analysis of prediction markets’ backlash risk.
For operators, the stakes cut both ways. If event contracts gain clear approval, scale players like DraftKings and FanDuel could leverage distribution to dominate. If restrictions tighten, smaller rivals could be sidelined while the OSB leaders refocus on regulated products with established economics. Non-sports contracts offer a lower-risk onramp, with Kalshi’s mix shifting toward that category. For now, investors are weighing the cash and compliance costs of building prediction capabilities against uncertain revenue and the prospect of abrupt rule changes.
What to watch next
Three threads will shape the next leg for the group. First, whether in-play momentum and higher structural hold translate into consistent outperformance for DraftKings, FanDuel and data suppliers like Sportradar as football season ramps. Second, how Illinois’ surcharge experiment plays with customers, and whether more states push progressive handle taxes that pressure the largest operators’ unit economics. Third, the legal trajectory of prediction markets, which will influence capital allocation and partnership strategies across the sector. If igaming’s growth rate holds and tax regimes stabilize, investors may reward business models that show discipline on promotions and a balanced mix of sports and casino. Until then, the market is likely to keep favoring operational consistency and clean exposure to higher-growth igaming over pure-play handle chasers.
