Sports betting stocks have been under pressure over the past month as prediction markets gained a lot of attention from investors, seeing their valuations skyrocket in just a few months. The New York Times reported Friday that Kashi raised $300 million at a valuation of $5 billion. This after Polymarket secured a $2 billion investment from the owner of the New York Stock Exchange at a valuation of $8 billion. Further discussing the risks to sports from these prediction markets is Jed Kelly, Oppenheimer’s managing director of securities research for consumer Internet companies, including sports betting companies. Jed, thanks for being here.
00:46 Jed Kelly
Thanks for inviting me.
00:47 Speaker A
So there’s a really interesting dynamic playing out here between the more established sports betting companies and the prediction market companies, although of course there’s some overlap because some of the sports betting companies also have prediction markets. But how do you think about the two parties and what the competitive landscape will be like?
01:13 Jed Kelly
Yeah, you know, essentially, I think they offer two different products. I think if you look at the traditional sports betting books, you know, fanDuel and DraftKings, they offer a lot better markets and more options. and then when you start looking at prediction markets, their offerings are a little more limited. and the other difference is that, obviously, Polymarket and Kalshi, they’re litigated for now under the CFTC, so they’re offering this at the federal level. I think what happens is what happens with the legality? Will prediction markets be available to all athletes in six months or even 12 months or, you know, will some of these state lawsuits like we’re seeing in Nevada, Maryland or Massachusetts and California with the tribes gain some traction?
02:18 Speaker A
In other words, although prediction markets are now available nationwide because they are overseen by the CFTC, that might not be the case, you know, six months from now or whenever these lawsuits come.
02:34 Jed Kelly
Right, because what Kashi is using now is that under the CFTC, they can’t be played. However, they say that sports are not part of games. States think they control the games, right? So this dichotomy arises about what will ultimately prevail. I think the general consensus right now among the investors we spoke to is that Kashi and Polymarket can offer sports contracts over the next three years. Something could happen sooner. It’s difficult, it’s difficult to predict. Um, right now, I mean, interestingly, Polymarket right now, you can take a lead, you know, at 40%, sports contracts may not be available under the CFTC by the end of the year. So there are a lot of moving pieces. I think for investors in DraftKings and Flutter, most stocks are probably lower for missing their September targets. I think if September had been in line with expectations, these stocks would be closer to where they were trading, you know, right before Labor Day. So I think it’s just creating a lot of noise. I haven’t seen any, we haven’t seen anything from a product, a pricing perspective that would make us think they would take part. At the end of the day, they are most likely different products. And I’m sure that when, you know, the venture capitalists and Ice made their investments in Polymarket and Kalshi, you know, their hope is that within 5 or 10 years, sports will be a smaller part of their business.