DraftKings Inc. (NASDAQ:DKNG) missed revenue expectations last week, but prediction markets dominated the earnings call.
To Joel Shulman, founder and chief investment officer of ERShares and portfolio manager of the XOVR ETF, the message was clear: DraftKings is now treating prediction markets as a business worth fighting for.
Asked whether DraftKings is validating Kalshi’s market or trying to take it, Shulman chose both.
“Both, and the validation is the more important signal,” Shulman told Benzinga. “…[A] year ago prediction markets were widely treated as a regulatory curiosity. Today the largest U.S. sportsbook has built its own exchange, is spending heavily against the category and is telling investors it expects to win it.”
Shulman disclosed that XOVR holds Kalshi through a special purpose vehicle and owns DraftKings in its public portfolio. He is also a co-founder of Signal Markets, a CFTC-regulated introducing broker in event contracts.
Draftkings Quarter Was Weaker Than It Looked
“It was a weak quarter, and the deterioration goes well beyond a single line item,” Shulman said.
Revenue fell about 5% to $1.44 billion, missing consensus estimates, even as adjusted EPS beat expectations. Shulman pointed to sports volume rising 15% and monthly unique payers growing 9% while average revenue per payer fell 13% and sales and marketing spending jumped 38% to $323 million.
“DraftKings bought a great deal of volume and monetized it considerably worse,” he said, arguing the spending surge looked like a response to competition rather than a one-quarter accident.
Real Assets, Missing Differentiation
DraftKings said roughly 600,000 customers have engaged with its predictions product, with annualized volume growing from $2.3 billion in April to $11 billion in July. The company argues that owning the brokerage, exchange and market-making layers can improve unit economics.
Shulman credited DraftKings’ installed customer base, national brand and newly launched DK Exchange, but said he has not yet seen a reason for customers to choose DraftKings over an established exchange with deeper liquidity. “Distribution will help with the trial. Liquidity and product will keep the customer,” he said.
Pushing Back on Robins
Kalshi CEO Tarek Mansour has argued that prediction markets are not sportsbooks because the exchange model matches buyers and sellers and collects fees, rather than taking the other side of customers’ bets.
DraftKings CEO Jason Robins told CNBC that rivals are “spinning narratives that just aren’t true.”
Retail customers, he argued, are often actually facing professional market makers and Wall Street firms, making the experience closer to a sportsbook than the pitch suggests.
“I disagree. The presence of professional traders does not turn an exchange into a sportsbook,” Shulman said.
Nobody argues an equity exchange stops being a market because institutions supply the liquidity, he added.
The Debate Over Cannibalization And Regulation
DraftKings says customer overlap with the largest prediction market operator runs near 1% in sportsbook states.
Shulman rejected that framing, saying the real question is where new customers and volume go over the next three to five years.
“If prediction markets posed no competitive threat, DraftKings would not be building a proprietary exchange and raising customer acquisition spend 38% in a single quarter,” he said.
Shulman also acknowledged prediction markets benefit from lighter taxes, national availability and an 18-year-old minimum age, but said innovation remains a larger story than regulatory arbitrage.
“Regulation will evolve, but a market this large and this established does not disappear with a change in administration,” he said.
Kalshi and Benzinga have an existing data collaboration agreement.
Image: Shutterstock
Login to comment