Morgan Stanley reiterates DraftKings stock Overweight rating at $39 target

Morgan Stanley reiterated an Overweight rating on DraftKings with a $39 price target, implying upside from the current $27.18 share price. The firm sees prediction markets adding about $50 million of net revenue in fiscal 2026 and $240 million in fiscal 2027, based on volumes of $3.9 billion and $16.9 billion, with a path to near break-even EBITDA contribution in 2027. DraftKings also reported May annualized consumer volume up 24% month-over-month to $1.3 billion and total volume traded up 34% to $3.1 billion.

Analysis

The market is still valuing DKNG like a mature sportsbook, but the incremental option value here is a prediction-market franchise with a very different economics curve. If management’s take-rate and margin assumptions hold, the segment is not just additive to EBITDA; it changes the mix toward a higher-frequency, lower-promotional product that can improve retention and lower CAC payback across the broader app. That creates a second-order benefit for the core betting business: more engagement per user, more cross-sell opportunities, and a more defensible data moat versus peers that remain product-complete but engagement-poor.

The key investor error is likely extrapolating current volumes linearly while underestimating how quickly a niche product can compound once liquidity and habit formation kick in. Early-stage prediction markets often look small until they reach a threshold where repeat participation becomes self-reinforcing; after that, volume can scale faster than traditional betting because the event cadence is broader and the product is less seasonally concentrated. If that happens, consensus 2027 numbers may still be too low, and the market will be forced to re-rate the multiple rather than just the earnings line.

The risk case is not adoption, but regulation and platform constraints. A favorable operating trajectory can be broken by state-level pushback, changes in classification/tax treatment, or a platform distribution shock that limits user acquisition efficiency over the next 6-18 months. There is also execution risk in assuming near-80% mature gross margins: market-making style products can attract adverse selection and promotional spend may reaccelerate if competitors decide to subsidize liquidity.

The contrarian view is that the market may be underestimating how cheap the stock still is on a 2027 framework if the new segment contributes meaningful EBITDA, but overestimating the certainty of that path. The right framing is not “does prediction markets work,” but “what probability do you assign to a structurally higher TAM with embedded cross-sell?” Even a modest probability-weighted contribution can justify a multiple expansion from current depressed levels, especially if monthly volume inflects for another few prints.

Key Decisions for Investors

• Go long DKNG on weakness over the next 2-4 weeks; use the current valuation gap versus 2027 power as the entry thesis. Target a 12-18 month horizon with upside driven by multiple expansion, not just earnings revisions.
• Buy DKNG call spreads 6-12 months out to express convexity around product adoption while limiting downside if regulation slows rollout. Favor strikes that benefit from a rerating toward the mid-$40s area rather than a full fundamental home run.
• Pair long DKNG / short a slower-growth online wagering peer if available in the book; the spread captures the market’s likely preference for incremental product optionality and better engagement economics over pure core-betting exposure.
• Trim or hedge if regulatory commentary turns adverse or if monthly activity fails to sustain momentum for 2-3 reporting cycles. The catalyst window is measured in months, but the tail risk can reprice the stock in days.
• Use a trailing stop rather than a fixed target if the stock re-rates quickly on adoption data; the path from 'interesting feature' to 'core platform lever' can compress faster than consensus models expect.