DraftKings Inc. (NASDAQ: DKNG) saw its shares close Tuesday at $23.44, down 3.5%, and slipped further to $23.37 in premarket trading Wednesday. The decline comes as the company rolls out a nationwide promotional campaign for its Predictions product, while investors weigh the impact of a California class-action lawsuit and a shrinking sports net revenue margin.
Q2 Results Show Volume Growth but Revenue Decline
In the second quarter, DraftKings reported sports consumer volume of $13.14 billion, up 14.5% year-over-year from $11.47 billion. However, sports revenue fell 10.6% to $891.9 million, compared with $997.9 million in the prior-year period. The sports net revenue margin dropped to 6.8%, down 1.9 percentage points from 8.7% a year earlier.
The company attributed the revenue decline to favorable customer outcomes and increased promotional spending, which included expenses for both Sportsbook and Predictions. The margin pressure is a key concern for analysts, as the company does not disclose product-specific revenue figures, making the overall margin the most transparent measure of profitability.
California Class Action and Regulatory Scrutiny
A proposed class action filed on August 13 in California alleges that DraftKings' Predictions product operates as an unlicensed sportsbook. The lawsuit seeks an injunction and more than $5 million in damages. DraftKings has not been found liable, and the company maintains that Predictions operates as a CFTC-registered introducing broker and holds NFA membership.
The legal challenge adds to the regulatory uncertainty surrounding event-contract trading, which DraftKings has been expanding. The company's ability to offer Predictions in California could be significant ahead of potential legalization of traditional sports betting in the state.
User Growth vs. Revenue per Payer
Despite the revenue decline, DraftKings saw monthly unique payers increase 9% to 3.6 million. However, average revenue per payer fell 13% to $132. Adjusted EBITDA plummeted 61.9% to $114.6 million from $300.6 million in the same quarter last year.
CEO Jason Robins said Predictions was “already growing faster than we anticipated,” but the financial metrics indicate that user growth has not translated into earnings. CFO Alan Ellingson maintained the 2026 guidance, projecting revenue between $6.5 billion and $6.9 billion and adjusted EBITDA of $700 million to $900 million.
Promotional Campaign and Competitive Landscape
On Wednesday, DraftKings launched its “Gameday” promotion, offering national deals across Sportsbook, Predictions, and Casino, including a free-fuel activation in Los Angeles. The campaign is seen as a test of whether promotions can drive engagement without further eroding margins.
Competition is intensifying. FanDuel, owned by Flutter Entertainment (NYSE: FLUT), and Fanatics have introduced their own prediction market offerings. DraftKings' balance sheet provides some flexibility, with cash totaling $983.9 million as of June 30, though the company posted a net loss of $67.6 million for the quarter.
Market Reaction and Outlook
Investors are closely watching the initial NFL user activity and the market open at 09:30 EDT. The key metric will be the revenue retained from each new transaction. The lawsuit and margin pressure remain overhangs, but improved sports results could quickly boost revenue.
DraftKings' stock has declined for six consecutive sessions, reflecting investor caution. The outcome of the California case and the effectiveness of the promotional spending will be critical in determining the company's near-term trajectory.
