Margin Squeeze and Forecasting Markets Lead to Rating Cuts Amid Volatile Sports Betting Industry

Bank of America’s recent decision to lower its ratings on

(DKNG) and Entertainment (FLUT), which owns FanDuel, has sent shockwaves through the sports betting sector. This move reflects mounting worries about unstable profit margins, increasing regulatory challenges, and the disruptive growth of prediction markets. Analyst Shaun Kelley led the downgrade, shifting both companies from "Buy" to "Neutral" and reducing their price targets to $35 for DraftKings and $250 for Flutter. Following the news, both stocks experienced significant declines—DraftKings dropped 6.4% to its lowest point in two years, while Flutter fell 3.9%, according to .

Kelley’s analysis described the industry as facing a “perfect storm” of obstacles. The sector’s structural hold—the share of bets kept as revenue after payouts—has weakened as favorable sports results have led to higher winnings for bettors. This squeeze on margins is further intensified by rising state taxes, such as the recent hike in Illinois, and tighter regulations, especially in the UK where Flutter operates,

reported. Kelley cautioned that these headwinds could persist until 2026, with states possibly raising taxes again to make up for revenue lost to the fast-growing prediction market segment.

Prediction markets, which enable bets on everything from political races to economic trends, are increasingly seen as a real challenge to traditional sportsbooks. Platforms like Kalshi and Polymarket have secured major collaborations, including partnerships with the NHL and ICE, the parent company of the New York Stock Exchange, according to

. These platforms offer lower fees and flexible pricing, drawing betting activity away from established operators. In response, DraftKings has acquired Railbird Technologies, a prediction market platform regulated by the CFTC, while FanDuel has teamed up with CME Group to introduce its own event contracts, reported. Still, Kelley pointed out that regulatory ambiguity—some states have warned that prediction markets could threaten gaming licenses—adds further complications to these initiatives.

The downgrades also highlight wider industry difficulties. DraftKings’ share of the U.S. online casino market has slipped from 27% to 23% over the past two years, and Flutter’s betting volume growth has slowed to 5% so far this year, according to

. Despite these setbacks, both companies continue to be major forces in the market. DraftKings recently landed a prominent deal with ESPN, becoming the network’s “exclusive Official Sportsbook and Odds Provider,” a partnership that could boost its profile ahead of its third-quarter earnings, noted.

Experts warn that the road ahead will be challenging. Kelley projects that DraftKings could see a $150 million EBITDA reduction in the third and fourth quarters due to shrinking margins and investments in prediction markets, with Flutter facing similar issues. As tax pressures mount and prediction markets expand, the industry’s “structural hold” may not be as reliable as before, NewsNet5 reported. For now, DraftKings and Flutter are adjusting, but the evolving environment suggests a lengthy period of managing margins and navigating regulations is likely on the horizon.