Morgan Stanley says buy into weakness in Flutter and DraftKings after Kalshi enters parlays market

Morgan Stanley advises buying into the weakness of DraftKings and Flutter after their stocks tumbled following Kalshi's entry into the sports parlays market, deeming the sell-off an overreaction and projecting over 40% upside for both. The firm argues that existing operators can adapt to new competition, citing market growth and the potential for Flutter and DraftKings to launch rival products if regulatory clarity emerges. While Robinhood has seen a rally from robust, high-margin prediction market volumes, Morgan Stanley highlights a significant regulatory risk if these event contracts are ultimately classified as gambling.

Analysis

Morgan Stanley posits that the recent, sharp sell-off in DraftKings (DKNG) and Flutter Entertainment (FLUT) shares, which fell 12% and 10% respectively, represents a significant buying opportunity. The decline was triggered by the entry of prediction market operator Kalshi into the sports parlays space, a reaction Morgan Stanley deems a 'knee-jerk overreaction.' The firm projects over 40% upside for both stocks to its price targets of $52 for DKNG and $352 for FLUT, arguing that these established operators can thrive regardless of the outcome. The core of this thesis rests on regulatory developments; if courts affirm the legality of Kalshi's model, both DraftKings and Flutter are expected to leverage their scale to launch rival products, with Flutter already having a prediction contract deal with CME Group. Therefore, regulatory clarity is viewed as a primary upside catalyst for the incumbents. In contrast, the outlook for Robinhood (HOOD) is more nuanced. While the platform has enjoyed a 17% rally fueled by 'robust prediction market volumes' with estimated high margins exceeding 70%, Morgan Stanley maintains an equal-weight rating. This cautious stance is rooted in the significant regulatory risk that its 'sporting events contracts' could be reclassified as a form of gambling, which would jeopardize this high-growth revenue stream.

Key Decisions for Investors

• Investors could view the recent 10-12% share price weakness in DraftKings and Flutter as a potential entry point, given the argument that the market has overreacted to new competition and that significant upside exists if regulatory clarity emerges.
• Monitor legal and regulatory proceedings surrounding prediction markets closely, as a ruling that affirms their legality is identified as a key positive catalyst for incumbent operators like DraftKings and Flutter.
• For Robinhood, weigh the recent rally and high-margin growth from its prediction markets against the considerable regulatory risk that these contracts could be legally reclassified as gambling, potentially undermining future revenues.