Short sellers reap more than $2bn profit betting against Paddy Power owner

Hedge funds have made at least $2.3 billion betting against online gambling stocks this year, with estimated paper profits of $2.0 billion on Flutter, $351 million on DraftKings and $35 million on Entain. The sector is under pressure from rapid US prediction-market growth and UK tax increases, with Flutter down more than 50% in 2026, DraftKings down about 30%, and Entain down 30%. Some short sellers have already taken profits, while Barclays sees a possible relief rally and Citi recently downgraded Flutter from buy to sell.

Analysis

The market is beginning to re-rate sportsbook economics as a structurally weaker business rather than a cyclical one. The key second-order effect is that prediction markets do not need to fully displace regulated sportsbooks to compress valuation multiples; even a modest share shift can force operators to spend more on promos, marketing, and product subsidies to defend engagement, which hits margins faster than top-line growth. That creates a self-reinforcing loop: lower margins justify lower multiples, which tightens financial flexibility, which further weakens competitive response.

The UK tax shock is more important than the headline P&L hit because it changes the hurdle rate on customer acquisition and product development. If operators cannot pass through the tax burden cleanly, the marginal player becomes uneconomic sooner, which should accelerate mix deterioration toward higher-value users and VIP retention. That makes reported revenue look resilient for a few quarters while underlying unit economics quietly degrade — a classic late-cycle trap for long-only holders.

The contrarian setup is that the short base is now crowded and the worst outcomes may already be embedded in names with the most visible US exposure. If prediction markets face regulatory friction or insider-trading scrutiny, these stocks can squeeze hard on any incremental good news because positioning is one-way and sentiment is already washed out. The cleaner bearish expression is likely not outright shorts here, but relative shorts versus names with less regulatory leverage or better optionality in adjacent gaming categories.

The main catalyst window is 1-3 months for a technical relief rally and 6-12 months for fundamental impairment as budgets reset and analysts cut forward estimates. The risk to being short is that managements respond with aggressive buybacks or cost cuts, which can stabilize EPS even while the business deteriorates. The bigger risk to longs is that consensus is still using stale assumptions about US handle growth and UK tax pass-through, so estimates likely need another reset before valuations find a durable floor.

Key Decisions for Investors

• Short DKNG into strength over the next 2-6 weeks; use rallies tied to prediction-market scrutiny headlines as entry points. Risk/reward favors a tactical short because sentiment is already weak, but the trade needs tight stop-loss discipline if regulatory pressure on prediction markets increases.
• Prefer a relative-value short DKNG vs long MGM over a 3-6 month horizon. MGM has less direct exposure to the prediction-market narrative and more diversified earnings streams, making it a cleaner way to isolate the sportsbook multiple compression risk.
• Buy short-dated DKNG put spreads 1-2 months out rather than outright puts. This captures downside from another estimate reset while limiting premium burn if the expected relief rally materializes.
• Avoid fresh long exposure to UK-facing online betting names until post-budget guidance is revised. Any recovery in the next quarter likely reflects short covering rather than durable fundamental improvement, so upside should be treated as tradable, not investable.
• If forced to own the group, hedge with a basket short of high-beta online gaming against broader consumer discretionary or media exposure. The objective is to neutralize sector beta while retaining optionality on a squeeze, since positioning makes timing more important than direction.