为什么 DraftKings 可能并非一场大赌局：Aganju 的 Tolu Bukola 谈 $DKNG

So, Tolu, the company we're going to talk about is one that I have looked at a lot personally, professionally, and all sorts of things. It's DraftKings, ticker DKNG. Obviously, there are lots of things to talk about here, but I'll turn it over to you. What is DraftKings, and why are they so interesting right now?

Yep. DraftKings is an OSB, an online sports betting operator. Though I will point out pretty soon that I actually think there's much more to it than sports betting. It's basically an online gambling company. They've been around since 2012, and they SPACed in 2020.

Historically, for most of its life as a public company, it's been a super-high-growth name. There were questions about quality of earnings, and it's kind of been in this land-grab phase of the growth of the U.S. online sports betting industry. Over the last 6 months or so, the stock has gotten absolutely trashed; it's been roughly cut in half. I started looking into it kind of late last year and started getting involved, and unfortunately, it's become even more of a value name since then. It's had a pretty tough year.

I think it started the year in the 30s and is at roughly $25. Essentially, what's happened is one of these things where I think there's a natural slowdown for the company in terms of some of the fundamental metrics, in particular the growth metrics. That's just a natural part of the market reaching a level of maturation. But then I think a big thing that's happened is there's this big existential thesis out there. The existential thesis is mostly about these things called prediction markets.

I'm sure many of our listeners have heard of these. A prediction market, unlike a sportsbook, which is a centralized entity that takes everyone's bets, is just an exchange. Instead of making a bet and then, 6 months later—or maybe days later, depending on your bet—cashing in or out depending on whether you won or lost, this is a place where you trade contracts.

The contracts will go between 0 and 100, or 0 to 1, essentially. Basically, the value of a contract represents the probability of a binary event happening. You can buy something for 30 cents, or 30%, and then maybe tomorrow it goes up to 50% and you sell and lock in a profit. You don't have to wait around. Unlike a sportsbook, you're not just making a bet and waiting it out. It's a lot more active. Some people would argue it's a lot more interesting.

These things have been around for a while. They've never really taken off in the United States because they've always been illegal, because they've been considered gambling. But several of them—in particular, Kalshi, which launched in 2018, and Polymarket, which launched in 2020—are really taking off over the last year. That's because Kalshi registered with the CFTC and is claiming that, instead of being a betting venue, it is a derivatives exchange, which has allowed it to bypass a lot of regulation.

That's the high level. There are a lot of things to discuss, as you said. We can start with the fundamentals, and I'm sure we'll spend a lot of time discussing the legal angles and things like that.

That's a great overview. It's funny to just say, “Explain DraftKings,” because if anyone has ever watched any sporting event, I'm sure they have an idea of what DraftKings and FanDuel are. But you hit the nail on the head: the big risk here is prediction markets, and we can start with those.

I should also mention one other thing. You entered the SumZero Stock of the Year 2026 competition, and I believe your DraftKings pitch came in third. Coming in third in any stock-pitch competition is great, but I believe there were hundreds of entries, so awesome work on that. This is an award-winning—or near-award-winning—pitch, depending on how you want to define coming in the top 3.

We'll get to prediction markets in a second, but let me start with this: You bought a position in DraftKings. There are a lot of things to talk about, and we're going to talk about them, but the market is a really competitive place. What do you think you're seeing that the market is missing? Do you think the market is just overblown on the prediction-market threat? Do you think the market is underlooking the fact that DraftKings is launching prediction markets, and maybe their history suggests they're going to take it? Or do you think it's something else entirely that the market is missing here?

There are 2 things. One is that I think the market is increasingly dominated by short-term traders. So what happened is that when you have a company where the top line is slowing and you have this thesis out there, the prediction markets are growing really fast. You also have a lot of data-driven traders. If you just look at the data, the prediction markets are private, so you can't buy them; every day, they show up and go up, up, up. And the data for this other thing is slowing.

There are a lot of people who mostly trade data points now. They're not necessarily looking out 2 or 3 years, so I think that's a big part of it. A lot of these people are also not considering the risks to the prediction markets, which is a lot of what we'll discuss and get to.

But in terms of DraftKings, I think because people are so focused on the sports betting business, they're ignoring what I think is the best part of the business, which is iGaming. To give you some perspective, iGaming is a little bit more than 20% of the revenue, and it's growing 20% to 25%. They don't really make it possible to do an easy sum-of-the-parts breakout, but they do give a lot of detail on costs. It's safe to say that the overwhelming majority of the costs—and a lot of the incremental costs of marketing and the prediction-market costs that they're incurring this year—all of that is on the sports-betting side.

So iGaming, even at a scale above $1 billion, I think—and once again, you kind of have to make some of your own assumptions about the cost breakout—I think it's realistically already doing $300 million to $500 million in EBITDA, right?

Let me ask there. iGaming—I do hear you—is growing quickly, and a lot of that is rollout and all that sort of stuff. But I think the thing people liked about the core DraftKings business, right, is: “Hey, there are a lot of fixed costs in the core DraftKings business.” There was the land rush in 2021, and basically everyone other than MGM, FanDuel, and DraftKings kind of gave up because the fixed costs and everything were too high. They were just incinerating money.

So I think people really liked the online sports betting business because they said, “Hey, it's evolved into this rational oligopoly, right? You've got 3 competitors. And yes, there's still some promos, but you've got this rational oligopoly in this thing that's probably going to be pretty recession-resistant, growing, margins blowing up as everybody starts doing crazier and crazier parlays.” You could see that.

I hear you on iGaming when it's growing, but when I look at iGaming, I say, “Oh, that's not an oligopoly, right?” Every casino has one. Caesars has one, MGM has one. Every state has 7 to 10 players if it's legalized. So yes, it's growing nicely, but it's hard to imagine that's going to have the same kind of nice oligopoly economics. It feels like that's going to be a big competition, and your customer acquisition costs are really going to eat into what the overall returns of that business are.

I hear you that it's there, but is it real when you're talking about switching the bull thesis from, “Hey, we've got an oligopoly in sports betting,” to, “Hey, and also iGaming is much smaller,” right? There is something about people loving to gamble, but there is something about my mom and grandma loving going and pulling the slot physically. They don't gamble on their phones. It's a much different game. It's like, “I want to sit at home and just press and tap slots and gamble.” So it's a smaller market. It's a more competitive market. Is that really a great, “Hey, this is what I'm resting the thesis on?”

So I would say it's part of the thesis, but yes, here's my argument for why I actually think you're underestimating the iGaming business a little bit.

Sports betting, like running a sportsbook, actually takes a bit of sophistication, right? It doesn't happen that frequently, but we do see sportsbooks blow up because they mispriced their risks. In terms of the LTV-to-CAC dynamics, where you do have to advertise a lot to get customers, it's essentially the same, right? But once you get someone into iGaming, they're a lot more profitable. There are a few reasons for that.

The sportsbook has the dynamic that the marketing goes on not just to onboard people, but also, to some extent, it's an event thing. Part of why they're difficult to run is that you can't have completely different odds from everyone else in a sportsbook.

In iGaming, people come onto this, it becomes their account, and you just monetize them, right? There will always be people offering bonuses and stuff, but that's no different from the sportsbook. It's a lot easier to monetize because you're not competing for people on an event-by-event basis, where people are going to go from, “I'm playing slots here,” to, “I'm playing slots somewhere else,” right?

The nature of the business itself is excellent from the perspective of the operator. In iGaming, these are just table games—slots, blackjack, for people who don't know. When people say that you can't lose money running a casino, they're not actually talking about sportsbooks, right? I told you, people have blown up money in sportsbooks. They're really talking about the table games, and that's because you have a built-in edge for the house. You just dump as many customer dollars on that as possible, and you essentially print whatever the edge is.

I think that dynamic is even better when it's online, right? I think about the slots in Vegas, where people are mad because they think they've slightly increased their win rate over the years. But when we're talking about online, you can do that instantly and automatically, and the kind of people who want to do this mostly don't know it's rigged, right? You can think they're some sophisticated sports bettors or whatever, but by definition, if you're playing a game like slots, where you're literally just pressing buttons and shiny things show up, you're not necessarily someone who's trying to win money.

The other thing, in terms of the size, is that iGaming right now is only legal in 11% of the states, containing 11% of the population. Sports betting is legal in states containing 60% of the population. I don't necessarily think iGaming is going to get there, but I think ultimately sports betting will be legal in the vast majority of the country, like 80%+. But if iGaming gets to 50%, that's 5 times the business, right?

So if we're talking about a $1 billion business now, and they keep market share, that's a $5 billion business that I think is already dramatically more profitable than the sportsbook. I think it's very easy to conceive of the iGaming business being worth easily the entire enterprise value right now.

No, look, I certainly hear you. I just worry about their customer book. Let's choose a state where it's not legal right now but where it opens up: Chicago. If it opens up in Chicago, who has a better bead on rolling out an iGaming business? Is it DraftKings, with its probably male-, youth-heavy sports betting business, or is it Bally's Casino in downtown Chicago, which probably has a bunch of older people who actually want to play the slots in its customer list? I don't know.

But just to say, though, you could have made that same argument—and I think people did make that same argument—about sports betting with respect to Caesars or something, and it turns out that it's mostly going to be a financial land grab to get the customers onboarded, and then you just execute it the same way.

It's a great point, and I know DraftKings just had an investor day. I was reading through the company's investor day presentation from early March of this year that I referenced, and that's what they said, right? They said, “Hey, we are DraftKings. We were daily fantasy sports.” And when this was legalized, everybody was like, “Oh, these guys are going to get murdered.” But guess what? We have the best systems, we have the best marketing, all this sort of stuff. We know how to do this.

It's not lost on me, as you're saying, that with their iGaming, they come out and say, “Look, we built everything from scratch. We built our own games.” Who do I think is going to make more creative games that appeal to iGaming better? Is it going to be Caesars, which can't even update its own properties in Vegas, or is it going to be this online-native business that's doing its own thing? By the way, the proof is somewhat in the pudding: they're doing very, very well in the states where they've already deployed it. So it's not like they're struggling to gain traction, right?

Let's move to prediction markets, because I think that is where the real bull-bear debate on this comes in, right? I will just straw-man and posit 2 things. When I hear bulls talk—I mainly hear bulls—and when I read the company's investor day presentation from early March of this year that I referenced, I hear them say the prediction market threat is overblown. Then I hear them say, “Hey, even if it's not overblown, in the next year or 2, SCOTUS is going to save us from prediction markets.” We can put the legal issue to the side for a second. I'd love to just talk about “overblown,” because I'll give an anecdote, and then I'll give a bull point.

One of my best friends, who's also an avid podcast listener—shout-out, Logan—and I text all the time about sports bets. It used to be that we would share DraftKings stuff, and now we share Kalshi stuff.

I was reading the Trotter transcript to prep for this, and I hear a guy who's a bull say, “Hey, I think the prediction markets are overblown.” That's the first sentence. Then in the second sentence he says, “To play devil's advocate, I'm a sports bettor, and I've moved all my sports betting from FanDuel and DraftKings to Kalshi.” I'm like, man, you just said it's overblown, and then you said you switched over.

It just seems to me that the prediction markets product is more liquid. It's a lot cheaper, largely because there are no gaming taxes, right? It just seems like a better, more liquid product. It's screaming to me that it's going to murder these people unless—we'll talk about the legal side—unless the government steps in. So let's talk about whether prediction markets are overblown.

Okay, so in terms of the product experience, I'm not going to disagree that it's better, but I think we have a bias, right? We are professional investors. This stuff innately appeals to us.

I’m not a big sports betting guy. To give you a hint of my background with prediction markets, I’ve probably been playing with them longer than just about anyone. I used to be on Intrade back when they allowed sports, and then they obviously faced a bunch of regulatory challenges. I actually ran a Google group for Intrade refugees.

I’m a big prediction-markets guy. To me, from a product perspective, it’s a no-brainer. Why would you not be able to trade your odds?

I do think one of the reasons I think maybe the market is overreacting to this is that it’s one of those things that happens to play very well to the bias of the people who end up making the investments. One of my favorite trades is when there’s something that’s really popular in the Midwest and the New York elite look down on it. I think it’s gotten overblown, but I do remember all the times that would happen.

That was such a great trade, because the guys who actually buy the stocks don’t like it, but if you just call up 10 customers, they’re like, “This is the best thing ever. I can’t wait for them to open a new store.”

It’s not only retail where it happens, but I agree with you: that’s a really great trade when all the finance people hate it, but the actual customers love it.

I think there’s a bit of the opposite bias here, where, obviously, to people in finance, this is just like, “Dude, throw these sportsbooks in the trash. It’s over.” But that’s, to some extent, non-disprovable. I will say that some of the evidence I lean on is that, as I said, prediction markets are not new.

Flutter’s Betfair, which is a prediction market, has existed in the UK for 20-plus years. It’s hard to get the exact data, but the best data we have is that they have about 5% of the market. They coexist with online sportsbooks, real-life casinos, and so on. The best evidence we have is that they’ve been able to get about 5%.

Now, you could argue that there are 2 possibilities. One is U.S. cultural exceptionalism, but the other is simply changes over time. Kids these days are a lot more online and a lot more comfortable with crypto and gambling. It strikes me that, when I was growing up, I was like, “Oh, I’m too scared.” But kids these days know, and it spreads through TikTok and Snapchat. If you’re doing something suboptimal, they’re going to spread it real fast, and you’re going to know.

Coinbase has been super popular—everyone trades, right? Trading has become part of the cultural zeitgeist over the last 5 years. I wouldn’t naively insist that we’re going to be limited to 5% like the UK is. It’s possible that it’s a lot more popular here, but the evidence does seem to suggest that it’s not something that, at least very quickly, replaces the sportsbooks.

If we look at the evidence of what has actually happened so far, it’s been really hard to see it in the data. The data released by DraftKings and other American operators is not to say there isn’t some displacement going on. I will tell you that one of the sell-side sources I used estimated that Kalshi already has 10% share of sports betting.

But you have to remember that 40% of the country’s sports betting is illegal, whereas Kalshi does not respect those limitations. We’ve been at war with them for a long time. They basically should have 100% share in California and 100% share in Texas, and there are all these places where they essentially have 100% share. When that rolls up to a 10% combined share, it doesn’t actually mean that they’re making a big impact in places where they compete head-to-head with sportsbooks. So far, we just haven’t really seen it.

The numbers DraftKings has released recently—given their growth, it’s naive to think that they’re not making any impact. They’re definitely making some, but we’re certainly not in a place where we can start to underwrite the thesis that these things are going to dominate the market or even be 20%. I’d say there’s still a significant amount of uncertainty there.

No, that’s great. BetMGM came out and reported earlier this week, and I subscribe to a lot of the gaming publications. Their CFO is not dancing around the issue. He says, “Our results were okay. They would have been much better if it wasn’t for prediction markets. They’re taking share,” all this sort of stuff.

Let me actually back up. As we sit here, you’re saying, “I agree with you. It’s California, Texas, Utah—these places where sports betting is just completely outlawed. It’s crazy to me that they only have 10% share, given that they probably have 100% share in those places.”

If we roll this forward and there’s no regulatory pushback, how much do you think prediction-market share stabilizes at in markets where they share with DraftKings and FanDuel—markets where sports betting is legal?

This is one of those things where there’s a tendency to make up a number, and I’m just not going to, right? We really just don’t know. As I said, the only real evidence we have is the UK and a few other markets where they’ve stabilized at single-digit percentages. But, as I said, different generation, different country. In the case where they do not face any kind of regulatory pushback, it’s hard to say.

I will say, though—and we’ll get into this more when we discuss the regulation—that in that case, there are actually things that will also benefit online sportsbook operators. When we’re talking about regulatory pushback, we’re not talking about pushback to put prediction markets at a disadvantage. We’re talking about pushback to put them on par.

If prediction markets are not prevented from operating in California, for example, or in Texas, that pretty much guarantees that those states will immediately legalize online sports betting so that they can at least collect taxes from the fact that people are already betting. In that case, we actually have this offsetting dynamic of maybe they become the thing that pushes for further legalization.

As to that core question, no one can predict the future that way. We can only hang our hats on the data we already have.

Look, it’s one of the reasons why I ultimately think the legal case does win. We can talk about the legal case in a second, but you just look at it and you’re like, “Okay, so we have unregulated gambling.” Governments generally do not like unregulated gambling. They don’t like the unregulated part.

But then, oh, by the way, DraftKings is generating tens of millions in tax revenue for many of these states. It’s unregulated gambling that’s not generating tax revenue. I just can’t believe that the government, even if the Supreme Court rules, “Hey, this is legal,” isn’t going to change the law.

If you make it completely unregulated, to me it clearly takes up a huge share, and it’s not generating any tax revenue. So even if you ignore the “Hey, we’re going to create a bunch of gambling addicts” argument—which I’m not sure whether governments care about or not—they certainly care about, “Hey, we legalized gambling to get 25 million in extra tax revenue every year, and now we’re getting zero.” I think they’re going to care about that.

Betfair was one of the really interesting pieces you shared—the piece that you came in third in SumZero with. You said, “Betfair, which is a bet exchange, stabilized at below 5% market share in Great Britain.”

We’ve already talked a little bit about how, 20 years ago, the people who were betting might have been a little less financially sophisticated. But even if you said that right now in the U.S. it’s 10% market share for prediction markets, and probably lower in places where they compete head-to-head, that seems crazy low to me.

Why did Betfair only stabilize at 5%? It seems like so much of a better model. I know Betfair has advertised one of its advantages as, “Hey, we’re 20% cheaper than all the alternatives.” Prediction markets might be 95% cheaper than DraftKings here because they don’t pay taxes, but why did Betfair stabilize below 5%? Why wasn’t it 25%, 30%, 50%, or 90%?

There are 2 things. One is what we’ve already discussed. I think there’s a cultural bias among traders like us to think, “Oh, this is an obviously superior product, so it should win.” Even with the whole idea that it’s cheaper, I’m not really sure. Most bettors are not sharp bettors, right? They’re not necessarily all about maximizing their edge, or they probably wouldn’t bet anyway.

So I think this assumption that this is an inherently better product and therefore should gain more market share is just kind of false, right? But, number 2, I actually think that in a world where there were no regulatory differentials or anything of that sort, to some extent it just reverts to the same thing in terms of competition. It ultimately comes down to LTV/CAC: who can do the most advertising?

How much money was Betfair able to invest beyond getting people to the product? Well, until they were bought by Flutter, they were a pretty small operation. They were bought by Flutter, so Flutter, obviously, relative to where they were, has effectively infinite money. But it's a little bit of a self-fulfilling dynamic: they didn't have enough money to pour billions and billions and billions into marketing the way the competition could.

In the scenario where we were on an even regulatory footing—which, once again, we'll discuss what that even means, because I don't think people understand the extent to which it's not just that we're not even; it's that prediction markets have massive unfair advantages right now—then, to some extent, it would also just be the usual land grab. Who's going to do the most promotions? Who's going to do the most marketing? Who shows up every time you listen to or watch ESPN, or listen to a podcast?

Right now, to some extent, you would expect DraftKings, Flutter, and everyone else to compete against the prediction markets, but also against each other in the exact same way that they already compete: “We're going to own all the podcasts. We're going to spend the marketing dollars.” It becomes a game of marketing scale. Obviously, this podcast is not devoted to sports, so I can understand why, but I am a little insulted that they haven't sponsored my podcast yet.

Just tell them you want DraftKings.

Yeah, get that money. You mentioned it. I think this is worth bearing in mind because when I talk to people—people who aren't, I don't want to say financially sophisticated, but people who just don't follow this super closely—a lot of times they don't realize, first, it's funny, sometimes people don't realize that when we talk about bets, the vig is how much the house is taking when you're betting.

They're like, “Oh yeah, of course you bet $100 to win, in a straight-up bet where both sides are even, you bet $100 to win $90.90.” I'm like, “Yeah, well, that $9.10 is the house vig.” But let's talk about the advantage that prediction markets have, because I don't think people who haven't looked at the math really understand why they're so much cheaper.

In a prediction market, you basically trade against other players. I guess it makes more sense to talk about sportsbooks, because to me they actually look a bit weirder. In a sportsbook, you place a bet, and then you either win or lose.

Sportsbooks have this thing where the total amount of betting is the handle, and they have this thing called hold, which is ultimately how much of the handle they get. It's basically sportsbooks pricing things efficiently, but also having a structural spread, in that if you were to make both sides of the exact same bet, you would actually lose money. That's just the spread that they collect.

By contrast, there is no spread on prediction markets. You're betting against another player. Someone wins exactly as much as someone loses, except for a transaction fee. Who knows where the transaction fees will stabilize? I think right now Kalshi's is about 7%. That's kind of the biggest difference.

Yeah, so I think that's a great one. If you just think about that, prediction markets, number 1, have an advantage there because if you and I are running a sportsbook, we have to have all sorts of sophisticated pricing technology. You're not just trying—if it's the Patriots versus the Seahawks in the Super Bowl—to even out the money on the Patriots on one side and the Seahawks on the other.

If people are doing more complex things, like if somebody bets on Drake Maye to throw 2 touchdowns, how do you have the other side of that? These things can get really complicated. So you have to hire lots of computer scientists, probably being replaced by AI right now, but yes, hire lots of people to do that. You have to deal with lots of regulatory stuff, and you have to have a book-building or risk-management process and all that sort of stuff.

Prediction markets, all of that's out the window, right? All you have to do is say, “Hey, we need to match Andrew and Tolu, and have one of them bet on the Patriots and one of them bet on the Seahawks, and just make the odds even where people are willing to trade.”

The other thing that I think I kind of implied earlier that is a challenge for the sportsbook is that you're also somewhat of a price taker. DraftKings can't set the odds of the Eagles winning the Super Bowl at a completely different price from everyone else, because that just creates arbitrage and all kinds of crazy risks.

If DraftKings says, “Hey, we think the Eagles should be 10-point favorites,” and they're 3-point favorites everywhere else, people are going to be betting like crazy everywhere else and then taking the other side of it. It's fairly complex.

Another way prediction markets have a huge advantage right now, which we've alluded to, is that DraftKings, in every state where it operates, faces state-level taxes. I believe it's applied to the hold, not the handle—but no, actually, it might be on the handle. I can't remember. Every bet, basically, they have to give the state government a cut.

Prediction markets, because they're regulated by the CFTC and not at the state level, don't give anything. When one side has to give a cut of everything right off the top to the government and the other side doesn't, that is just a massive tax advantage that prediction markets have.

I think we're getting to some of the legal issues now. Prediction markets claim to be federally regulated, so they don't pay these taxes. The taxes can be really high, by the way; they go all the way from 5% or 10% to 50%.

I think Illinois—and this was a big risk over last summer, I thought, for DraftKings—unilaterally changed the taxes on sports betting there. DraftKings and FanDuel were like, “Okay, well, now we have to...” I believe they started instituting, if you're an Illinois bettor, a 5-cent tax, because that's what they did, and they had to pull back all their promotions—everything. So it can be a big number.

That's one of the risks to this business, right? We know how government and taxation works. They'll always be tempted to take more, and a gambling business is something people tend not to be super sympathetic to. Just like you can always increase the taxes on cigarettes and booze, because there won't be as much pushback on that, you can kind of always increase the taxes on gambling.

The prediction markets are not paying these taxes, which I think average out to about 20% across the states, and yearly—I forgot the exact number—but it's getting close to $10 billion, right? They're not paying these taxes. They're also allowing anyone over the age of 18 to bet, whereas most states restrict it to 21.

Obviously, the big one everyone focuses on is that they will allow you to do this in any state, including states where sports betting is illegal, and that includes many of the biggest states—in particular, California and Texas.

State gaming commissions have all kinds of requirements. You have to do all of these things about problem gambling. You have to monitor problem gambling. You have to do all of these sports-integrity rules and make sure that if you see a chance that someone is insider trading or someone is match-fixing, you flag it. All of that stuff is very expensive. Prediction markets currently don't have to do any of that.

We're obviously talking about sports betting, but anyone who's followed any of the news knows that once a week you see, “Hey, someone in the Trump administration made one decision, and 15 minutes before, the prediction markets were lit up with people buying things.” If that's happening in politics, you're probably not going to have a LeBron James gambling on himself in a game, but think about all of the scandals that the NBA had in the past year.

The prediction markets are so anonymous and so easy, and they have just no regulatory infrastructure around stopping insider trading. You could imagine real scandals developing in the prediction markets.

I think we already have, right? And speaking of non-sports things, I think what's actually brought a lot of really negative legislative attention to prediction markets is that, for all of the military operations we've had against Iran and Venezuela...

So, there have been members of both the U.S. and Israeli militaries betting on when these operations would begin based on their insider knowledge, which is a national security risk. It’s absurd. People went to jail; some of the Israeli people went to jail for it.

But I did start wondering: if you didn’t regulate it, could you have the Trump administration say, “All right, we’re going to attack,” and just throw in $10,000 real quick?

Or, I said, Trump and any administration. If everybody starts monitoring this, that would create a crisis in another country. We’re actually not going to do anything, but it’d be the cheapest way: $10,000, and you stir up an entire foreign government to go five-alarm, red-alert fire.

It’s kind of interesting to think about the game theory: if the prediction markets aren’t regulated, everybody’s paying attention, and you just throw a little money in, you could cause another government to call up 500,000 reserves or something.

Yeah, yeah. There was also the Bad Bunny one, where some Bad Bunny insider was betting on exactly where we would be in a Super Bowl. Some of them have been really stupid. There was a MrBeast one.

I think we’ve talked about this, and I’m going to come back to valuation and fundamentals second, but what is the legal path? I mean, DraftKings, BetMGM, everyone is looking for a legal path to shut this down and get what I would call a fair playing field. What does the legal path to get there look like?

Okay, so there are 3 legal paths, and we’re going to focus on 1. I’ll just explain what the 3 are. The first one is that Congress steps in, makes legislation, and stops prediction markets from doing sports. We’ve had some proposals, as you can predict, from the states they came from—Nevada. We’ve had some congressmen getting on board with banning prediction markets from sports. We’ve also had some calls to basically ban prediction markets altogether.

How likely is this? Honestly, I don’t know. I think some of the stuff, like the insider betting around the Iran attack, is making it much more likely that we see a legislative intervention. That’s something that’s quite possible, but I don’t necessarily focus on it. I think our Congress is kind of dysfunctional, so I don’t bet money on what they’ll do.

The second path, and that’s the one we’ll discuss the most, is that I think there’s a very strong case that what the prediction markets are doing is already just illegal—and illegal in some truly absurd ways that we will go into. The second path is the one that I think is progressing steadily: prediction markets either suing or being sued by 20-plus states. We’ve already had some circuit splits. This is basically guaranteed to get to the Supreme Court.

I previously thought it was going to be in 2028. This stuff is moving so fast and has already created so many splits—well, it’s already created 1 split, and it’s basically guaranteed to get several more this year—that I think we could see an acceleration of that timeline. Maybe 2027 is possible.

The third one, which people don’t think about, is that the prediction markets are able to do what they’re doing due to the complicity of the CFTC. The CFTC is historically a commodities regulator, the little brother of the SEC. It only has 700 employees and 250 lawyers—not a very big federal agency.

What happened under the Trump administration is that, essentially, the crypto people donated a ton of money to Trump, and what they wanted was less regulation of crypto. Part of how they achieved this was moving it from the well-resourced SEC to the CFTC. They got what they asked for. It’s some of the best return on money people could ask for.

Oh yeah, they got exactly what they asked for. The funny thing is that, aside from not being particularly well-resourced historically—the CFTC typically has 700 employees and 250 lawyers—it’s particularly under-resourced right now because basically the entire enforcement division quit or was pushed out. It has no enforcement division. It’s normally supposed to have 5 commissioners, and it only has 1. The guy is an ex-crypto lawyer, so you can guess how he feels about all these things. He isn’t basically putting his full force behind the prediction markets, right?

But even if you accept the legal status quo—even if the Supreme Court doesn’t really pull back on the CFTC’s ability to regulate these things—a future CFTC would have the right to stop all of this, right?

One of the cases involved Kalshi in October or November 2024. Before it started doing sports, it started doing elections, and the CFTC actually sued it to stop the elections. Kalshi won on the argument that the CEA—the law that created the CFTC—has a special provision giving the CFTC the right to review contracts whose underlying function is gaming.

The court ruled that, because elections are not gaming, it’s not clear that the CFTC has a right to regulate these election contracts. But what’s interesting about that is the implicit assumption by both the court, Kalshi, and the CFTC that if the underlying function were gaming—and they literally used the exact example of the Super Bowl—the CFTC could regulate it.

The point here is that we’ve established that the CFTC can, in fact, regulate sports contracts. The only reason the CFTC isn’t doing so is because it’s kind of bought by these crypto interests, who also happen to be a lot of the same people who are now involved in prediction markets, and so it doesn’t want to.

A future Democratic CFTC could, even under the legal status quo, just say, “All of this is over,” right?

Great overview. I want to go to valuation in a second, but let me just lay out my worry here. Again, I have no position here, but if I just laid this out, I think people could probably tell that I fully believe this should be regulated, and I fully think at some point hands are going to get forced just because we’re losing out on tax revenue and all this sort of stuff.

But my worry is that you laid out the Supreme Court probably in 2028, maybe 2027 at this point, and a new CFTC commissioner maybe in 2028. You probably need a change of administration, and probably a Democratic administration. All these things are 2 to 3 years away.

I think listeners could probably tell that, in a righteous world, this should happen, and we should have an even playing field and regulation. But my worry is: Is it 2 years away? In the intervening 2 years, I think both you and I could agree that prediction markets as is are probably a superior product.

I worry that a superior product just takes a lot of share. As we’re waiting for those 2 years, every day there’s this drip, drop, drip of more prediction markets. Look at the prediction-market volumes. Every broker starts launching a prediction market to get in on some of this volume, and this competition is rising.

So, I’m going to pause there, and then we can just talk valuation and everything.

Yeah, look, there’s a little bit of investment philosophy here. To me, this is part of why this is interesting. People are paying so much attention to the dip in the data on the prediction markets and to their increasing volumes. That’s why you get to buy it at these valuations, right?

To me, the investment thesis is the opportunity to look 2 years out and say, “Okay, this would have grown a little bit more.” Their iGaming business would have grown more, and at the same time, we’ll likely be getting 1 of the big existential risks taken off the table. At that point, people will be able to look at more of the underlying end-state economics of this business and say, “Wow, this is really cheap relative to what we think is going to be the long-term profit generation.”

There’s a shorthand way to value this, right? The prediction markets kind of started in August, and I don’t think this is a really AI-able business, but it was trading at 45 to 50 in late August. Then the prediction-market scare really started happening, and it’s trading at 23 now.

Is the right way to think about it that it grows a little bit in 2028 and 2029, there’s some type of regulatory crackdown on prediction markets, and we go right back to 45 to 50? So, you’re kind of looking at a 2- to 3-year double. Or is there any way you want to value it? Is that kind of a fun and easy shorthand way to look at it?

I do think you’re kind of looking at a 2- to 3-year double. The way I think about it is that you have to look at the long-term economics. At their latest investor day, they guided to their long-term 30% EBITDA margins. I think that’s achievable.

But they’re still kind of in the land-grab phase, especially in the sports-betting business. The only way to really think about long-term economics is just looking once again at the example of markets where sports betting has been legal for a while and where we have similar competitive dynamics to what we’re likely to experience, which is a little bit oligopolistic: a few big players, and then a long tail of worse players.

So, if you're looking at both the UK and Australia, these businesses have kind of settled at roughly 30% EBITDA. Like I said, if you break out the iGaming business, it's already well over 20%, and they're basically barely breaking even on sports betting. That's because they're spending all this money to gain share, and they're also now spending a bunch of money to defend themselves against prediction markets.

Let's say you don't want to underwrite the 30%. Let's say you want to think about it like 20%. They did $6 billion this year. If you think they'd grow at just 12% to 15%, they'll be close to $9 billion by 2029. This isn't a very aggressive rate of growth, because even if you're not getting further penetration in sports betting, you're going to get a tailwind from going from 60% of the population to 80% of the population. On the iGaming side, you have a lot more upside, so it's not a super-aggressive rate of growth.

We're talking about being basically 50% bigger than they are right now. You start to adjust what you think could be end-state margins to that. You don't give them credit for the full 30%; let's say you give them 20%, or even 15%. We're talking about $1.5 billion to $2 billion of EBITDA. That's what you would think of as normalized EBITDA in 2029, and then we can apply whatever multiple we want. I think a business like this probably gets 12 to 15 times.

If you put 15 times on even a lower-than-20% mid-cycle margin—let's say a 15% margin in 2029—that easily gets you into the 40s. If we do get a little bit of a dissipation of the prediction-markets thesis, because they've gotten some regulatory pushback and have had to submit to state regulation, you could imagine that these companies get a profitability bump from not having to spend money to compete in that space. You could also imagine that they'll get a multiple bump. In the base case, I think you basically get a double, and then there are cases where you get a triple or more.

Right. I mean, I will say, I think if there was a Supreme Court ruling tomorrow that said prediction markets were illegal, DraftKings would double overnight, to be honest with you. But let me ask 2 last questions, and then I'll give it to you for last thoughts, and then we can wrap up prediction markets.

We talked about it a little bit at the beginning, but let's say we continue living in the world we're in right now, and prediction markets, for whatever reason, don't get regulated, or get light-touch regulation—whatever you want to call it. DraftKings is moving into prediction markets as well. We had talked about how DraftKings has a history of winning in these spaces. You and DraftKings both mentioned that no one thought you could win in sports betting.

What do you think it looks like if prediction markets don't get regulated and DraftKings has to move into them? Do you think they stand a chance against Kalshi and Polymarket? What do you think the end-state economics look like if this becomes more of a prediction-market business than a betting business?

I don't think there's any situation where I wouldn't see that as a disaster. I just don't think they necessarily have an advantage in this space. Prediction markets are actually much more of a network-effects business.

Sportsbooks are a scale business in terms of marketing scale to attract customers. But in prediction markets, the absolute number of customers on the platform makes a big difference, which is why it's also important that they're able to avoid manipulation, be nationwide, and allow cross-border betting. Who knows where they settle, but they're already behind. I'm not sure there's any reason to suggest that they would be one of the top 3 or 4, in which case I'm not sure there's anything to suggest that they would be able to build a substantial business.

In the prediction-markets world, that means both that prediction markets don't undergo any kind of regulation to bring them under state control and that they become 50% of the market. That is the bear case. I don't see a world where that happens and somehow DraftKings is still on top. That is the ultimate bear case.

Last question. If we were recording this podcast in mid-2023, I think the main question would have been: What are the economics of DraftKings, FanDuel, and everything in U.S. sports betting? People would have suggested, as you did, that we could look to the mature markets—Australia, England, and so on—and say, "These are the margins." But I think people would have said, "DraftKings has kind of had 3 years. It's looking a little bit more competitive, margins are lower, and parlays really started exploding."

For those who don't know, on your average bet, I think the house take is around 10%. As you start layering in more and more parlays, the house take just goes up and up, because they exponentially increase all of the house odds. You combine 2 bets that are at 10%, and all of a sudden you're at 18%, whatever. I think margins really exploded with parlays, and I just want to ask you about that.

I would say parlay culture is driving that. Every advertiser is pitching parlays. You see these 20-leg parlays where 1 person bets $1 and wins tens of thousands of dollars, and those always go viral. I know I do it: every now and then I'll watch a game and say, "Let's throw an 8-leg parlay on for $1 just to make this game more interesting."

You hear people say parlays are predatory. The odds are so long, they favor the house so much, and they're sucking in younger kids. Do you worry about crackdown risk on parlays at all? I know there are people out there who say, "Let's just eliminate them. It's better for safer gambling. Let's take some of these long-shot odds out." Do you worry about that, because it would materially change the economics of these businesses?

No, I don't. I don't worry about crackdown risk on parlays in particular any more than I worry about the broader regulatory risk for these businesses. Part of the risk case for these businesses is that they get heavily regulated. There might be a focus on parlays right now, with people saying they're predatory, but the vast majority of people are going to lose money sports betting. There's a case that the entire thing is predatory.

To the extent that I'm worried, it's more about whether taxes keep going up. With Kalshi and prediction markets being so aggressive and bringing more attention to the space, we're also seeing a general sense that they've unleashed this terror around sports betting—a little bit of a moral panic. Given that this is the United States, and we refuse to regulate guns when they kill kindergarteners, I don't think we're going to get super regulation, but it is a risk.

There's an extent to which every type of gambling is a fundamentally predatory business, in the sense that it's intended for the customers to lose money. The counterargument is that it's just entertainment.

Yeah, no, well said. I guess the other argument I could have made was that there are 1% of the population who are ruining their lives with these things, but we've shown no desire to crack down on or hit those people. I think you're right—it's a really interesting case.

I think people can get this through the podcast: both you and I believe the prediction-markets thing is insane, but you've got this huge risk. If the government does not step in to shut down prediction markets, maybe the future is fine for DraftKings. Maybe they become a big prediction-market player, but they lose this oligopoly they've got.

On one hand, you're relying on the government to crack down on this side. On the other hand, you've got parlays and all these long-shot bets that are pretty darn predatory. You hear in some corners, "Maybe they should have banned them," but you're relying on the government to say, "No, we're not going to touch this, but we're definitely coming after that." And guess what?

I will say that it's a little bit different, because I don't think the reason the government is going after prediction markets is the moral-panic aspect. No, it's revenue. The reason we allow you to do things that people consider morally more exploitative is that now the government is using the sportsbook as a conduit. It's just revenue.

We're on the same page, my friend. We're on the same page. I was just saying it's funny that you want the government to crack down here but not over there, you know. This has been really fun.

I thought you did a great job walking through all this sort of stuff. As you saw, I'm pretty passionate about this. Is there anything else you think we should have hit that we didn't hit, or should have hit harder, that we kind of lost along the way?

I will say, though, that I'll find a place to put up the thesis so people can read it.

Oh, send me a link. I didn't want to say, “Hey, I've got the secret thesis,” but if you send me a link, I'll include it in the show notes and everything so people can look at it.

I will say, though, I guess the part we didn't spend as much time on, but that I wanted to emphasize, is that I think the Supreme Court angle is really strong in terms of the case against the prediction markets being legal and being able to avoid state regulation. I think what the prediction markets are claiming from a legal perspective kind of borders on the absurd in the way that it violates 100 years of American law, including laws that the Supreme Court addressed previously, and in the way it's basically an argument for handing over regulation that we spent all these years crafting to what is, basically at this point, just 1 guy at the CFTC. I would be shocked if it flies.

Right. I'm completely with you. And look, the Supreme Court—you can look back—sports gambling became legal, what, 10 years ago?

2018. Yeah, so they've addressed this recently. We know how they think about these things. It would just be completely shocking. And by the way, not just that, but you're going to have every league—every sports league—is going to file a brief with the Supreme Court that says, “Hey, we need this regulated for integrity of the game,” and all this sort of stuff. Every—you mentioned 20. It's probably going to be—

Basically every state, yeah, is going to say, “Hey, for financial reasons, for safety reasons, all this sort of stuff.”

Also, the last constituency that's really powerful here is the Native American tribes, right? So they've had special interests in gambling for a long time, and as a result, a lot of them actually do have a pretty substantial amount of money. Aside from all the state attorneys general that are suing and being sued by Kalshi, the Native American tribes are also going to be suing the prediction markets directly, and I actually think their case is even more straightforward, right? Because there's no federal preemption, right? There are all of these statutes that basically give Native Americans special rights, and there's even this Indian canon of construction that basically means that you're supposed to construe laws in a way that favors the tribes. And so what the prediction markets are trying to pull, which is to draw some ambiguity in the law and use it to seize all this power, fails even harder when you start considering the Native American tribes.

Perfect, perfect. Cool. Well, hey, this has been awesome. If you send me Dropbox links or whatever to the write-up, I can include it in the show notes so everybody can go read it. He breaks down a lot of the different legal arguments in full detail in the write-up, so I'll include it there. And Tolu, this has been great. A great first appearance. I'd love to have you on for a second one. We'll follow up and get you back on here in the near future.

Awesome, thanks. It was great coming on the show.