Analysts Split On Gaming Stocks, Prediction Markets

Wall Street analysts covering the gambling industry are offering a mixed read on gaming stocks and the fast-moving prediction markets sector, according to a round-up of recent research notes.

J.P. Morgan's Daniel Politzer said in a September 8 note that August was a rough month for the sector. "On average, our gaming coverage fell -7% during the month, materially underperforming the [S&P 500's] +3% and marking the group's worst August since 2019," Politzer wrote, pointing to summer trading doldrums, the Iran conflict, macro pressure from higher rates and general sector uncertainty as potential explanations. 

Heading into conference season, Politzer said regional operators - including Penn National, Red Rock Resorts, Boyd and Churchill Downs - "screen most interesting," with fundamentals he described as disconnected from recent share-price weakness.

The Legal Battle

Truist Securities' Barry Jonas focused on the legal fight over prediction markets in a note dated August 31. He flagged that the Ninth Circuit ruled against Kalshi on August 28, keeping its sports prediction contracts out of Nevada and “potentially driving more state bans.” 

With the Fourth and Sixth Circuits yet to weigh in, Jonas noted a split now exists between the Ninth Circuit and the Third Circuit's New Jersey ruling, raising the prospect of eventual Supreme Court review - a process he estimated could take 10 to 22 months. 

He added that sportsbook operators DraftKings and Flutter, both rated buy by Truist, rallied late in the week on the Ninth Circuit news.

Vertically Integrated Operations

Jefferies' David Katz took a longer view of the prediction markets value chain in a September 2 note, estimating that exchanges (dedicated contract markets) are positioned to capture roughly 65% of explicit transaction fees, with market makers generating additional economics through bid-ask spread capture, rebates and liquidity incentives. 

Katz estimated a market maker capturing a $0.01 spread on a $100 trade, while managing risk effectively, could generate about $1.69 of net economics - a dynamic he said underscores the case for vertically integrated operations. He named Kalshi and Crypto.com as the most integrated players, alongside DraftKings, Flutter and Robinhood.

What Next?

The notes collectively point to an industry still working through the fallout of a volatile August for gaming equities, even as the legal fight over whether prediction markets can offer sports-outcome contracts across individual states remains unresolved and increasingly likely to end up before the Supreme Court.

The split among analysts mirrors a wider divergence in how Wall Street is pricing the prediction markets opportunity against its regulatory risk. 

While Truist's Jonas is watching the circuit-court split for a potential path to Supreme Court review, Jefferies' Katz is focused on where the economics ultimately land within the value chain regardless of how that legal question is resolved - a distinction likely to keep shaping how gaming-sector investors weigh exposure to Kalshi, Polymarket, DraftKings, Flutter and Robinhood over the coming months.