DraftKings Inc. (NASDAQ: DKNG) saw its shares rise 4.3% on Friday, closing at $25.26, following a federal appeals court decision that reaffirmed the authority of state regulators over sports prediction markets. The ruling, which sided with Nevada in its dispute with Kalshi, strengthens the position of state-licensed operators like DraftKings against unlicensed competitors.
The stock touched an intraday high of $26.58 before settling at $25.26, a gain of $1.04. Trading volume reached 19.90 million shares, a 64% increase over the company's 12.11 million average, reflecting heightened investor interest. This rally added approximately $516 million to DraftKings' market capitalization, which now stands at roughly $12.5 billion based on 496.45 million shares outstanding.
Court Ruling: A Win for State-Licensed Sportsbooks
The Ninth Circuit Court of Appeals ruled unanimously that Kalshi, a prediction exchange, failed to demonstrate that federal law preempts Nevada's gambling regulations. The court upheld the removal of an injunction that had allowed Kalshi to offer sports-related contracts without a state sportsbook license. This decision is a significant victory for DraftKings and other regulated operators, as prediction exchanges have been able to operate nationwide without obtaining individual state licenses.
Friday's ruling reinforces the state-by-state regulatory framework that DraftKings operates within, giving it a competitive edge over unlicensed platforms. However, a conflicting decision from the Third Circuit remains in effect, creating legal uncertainty that could eventually reach the Supreme Court.
Market Reaction and Peer Performance
The legal development had a pronounced impact on online-focused betting stocks. DraftKings closed 5.0% below its intraday peak, and the share price remains 48% below its 52-week high of $48.78. Flutter Entertainment (NYSE: FLUT), parent of FanDuel, rose 7.12% to $101.78, while MGM Resorts (NYSE: MGM) fell 1.66% to $42.28. Caesars Entertainment (NASDAQ: CZR) edged up 0.37% to $29.73.
Investors interpreted the ruling as a positive signal for companies with established state licenses, as it may limit the expansion of prediction exchanges that have previously bypassed state-level oversight.
Promotional Push and Customer Acquisition Costs
The legal win comes amid a costly customer acquisition drive. DraftKings is offering a $200 welcome bonus for a qualifying $5 bet, a promotion that is 40 times the required wager. The bonus is distributed over 21 days and must be used within seven days of issuance, as reported on August 28.
This aggressive promotion is 52% higher than DraftKings' average monthly revenue per payer of $132 in the second quarter, underscoring the company's focus on conversion and retention over mere sign-up numbers. The strategy appears to be driving volume, with sports handle up 14.5% to $13.14 billion in Q2, but it is also pressuring margins.
Financial Performance: Revenue Growth vs. Margin Pressure
DraftKings reported second-quarter sports revenue of $891.9 million, a decline of 10.6% year-over-year, as net revenue margin narrowed to 6.8% from 8.7%. The company attributed the margin compression to customer-friendly outcomes and higher promotional reinvestment. Sales and marketing expenses surged 38.3% to $322.5 million, while adjusted EBITDA plummeted 61.9% to $114.6 million.
Monthly unique payers increased 9% to 3.6 million, but average revenue per payer fell 13%, reflecting the impact of the promotional strategy. Despite these headwinds, management maintained its 2026 revenue guidance of $6.5 billion to $6.9 billion and adjusted EBITDA forecast of $700 million to $900 million. Based on Friday's close, the stock trades at approximately 1.9 times projected revenue at the midpoint.
Looking Ahead: Legal and Regulatory Risks
The next key date is September 3, when New Jersey faces a deadline to challenge the conflicting Third Circuit decision. A broader review by the Supreme Court could potentially overturn Friday's ruling, posing a risk to the regulatory advantage DraftKings currently enjoys.
Analysts note that while promotional offers may boost user acquisition, they could continue to erode revenue per payer. Additionally, sports outcomes could offset short-term handle growth. The legal landscape remains fluid, and investors should monitor further developments.
