DraftKings Crashes As "Aggressive Prediction Investments" Drive EBITDA Outlook Cut

DraftKings shares crashed 24.5% in Friday's premarket trading after the sports betting operator slashed the midpoint of its 2026 adjusted EBITDA forecast to $225 million from $800 million. The mad dash into prediction markets overshadowed a 16% year-over-year increase in third-quarter revenue to $1.33 billion."In just a few months, we have become the clear number three Predictions exchange by Total Volume," CEO Jason Robins wrote in a letter to shareholders.BofA Securities gaming analyst Julie Hoover attributed $475 million of the $575 million guidance cut to additional investment in prediction markets. The remaining $100 million reflected a lower adjusted EBITDA forecast for the core business.Hoover wrote in her first take:Q3 Miss and 2027 estimate resetDraftKings (ticker: DKNG) reported Q3 revenue/EBITDA of $1.33/-316M vs. BofA $1.345B/-$100M and the Street's $1.393B/-66M. DKNG lowered their full year EBITDA guidance to $225M at midpoint vs. $800M, embedding $475M of incremental prediction market (PM) investment and $100M reduction to the core. For 2027, DKNG provided initial guidance of ~$800M-1B, including $300M of EBITDA loss related to PMs.Bottom line: Shares of DKNG traded down -23% after the close on a bigger-than-expected 2027 numbers reset. Investors are disappointed by the magnitude of PM investment given the looming regulatory risk around sports event contracts. DKNG's desire to be best-in-class has driven its top-line success, but greater guardrails around spend, particularly in the current regulatory backdrop, are critical to drive the bottom line and stock. We reiterate our Buy rating with numbers reset, and PMs a potential source of upside. We lower our PO to $23 based on 14x 2027E EBITDA (11x core 2027E EBITDA).DraftKings’ 2027 guidance for prediction markets calls for $700 million in net revenue and $500 million in gross profit, with operating expenses rising to roughly $800 million from about $675 million this year. Hoover estimates that higher fixed costs account for approximately $50 million of that increase, with another $75 million going toward marketing. The additional marketing spending was unexpected, although a projected high-single-digit decline in core marketing suggests some dollars may be shifting between the businesses. Given DraftKings’ prediction-market share and the market’s rapid expansion, the revenue forecast could prove conservative.Core: Investing in iGaming, +6% revenue growth in 2027The company is investing roughly $40 million in iGaming this year to support longer-term growth. Third-quarter iGaming revenue rose 2%, below her 8% forecast, primarily because of increased promotional activity. Renewed investment looks sensible following two years of market-share losses. The company’s 2027 core revenue and EBITDA outlook assumes 6% revenue growth, with iGaming expanding faster than online sports betting. Although marketing spending can move between the core business and prediction markets, the guidance implies that 75% of incremental core revenue will translate into EBITDA - an ambitious assumption given the competitive promotional environment.Here's what the rest of Wall Street analysts are saying (courtesy of Bloomberg):Bloomberg Intelligence "DraftKings' deep 2026 revenue and EBITDA outlook cuts on aggressive prediction investments create urgency to realize a targeted 20-month payback that defers prediction-market profit to late 2027 yet still implies a faster payback than for sportsbooks," Brian Egger writesMorgan Stanley (overweight, PT $31)The material reduction in outlook should weigh on the stockThe forecast cut was driven not only by prediction market spend but also a weaker coreCFRA (buy, PT $40) Analyst Zachary Warring says profitability deteriorated sharply as DraftKings accelerated investment in its Predictions platform "For the nine-month period, the shift is even more pronounced: Adjusted EBITDA swung from a positive $276.8M to ($34.4M), underscoring the magnitude of Predictions-related investment"Vital Knowledge"DraftKings reported a big miss on headline EBITDA in Q3 due in large part to heavy spending as mgmt. builds the predictions business, and this issue will extend into 2027, w/an aggregate EBITDA guide mid-point of ~$900MM below the consensus of $1.1B," writes analyst Adam Crisafulli Says that while the company sounds very bullish about its predictions opportunity, this is coming at the expense of the core sportsbook businessAccording to Bloomberg data, 31 analysts rate DraftKings a Buy, eight rate it Neutral, and one rates it a Sell.The consensus 12-month price target is about $32.25.