Some growth stocks get punished because the business is breaking. Others get punished because investors do not like where management is spending next.
This setup looks closer to the second case. The core business is still growing, profitability is improving, and the stock is trading far below its highs.
The risk is real, but the selloff has created a much more interesting entry point.
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What Just Happened
The stock is lagging even as the business improves
DraftKings Inc. (NASDAQ: DKNG) recently closed around $25.77, still well below its 52-week high of $48.78. The stock has also lagged over the past month despite the company continuing to show revenue growth and improving profitability.
That disconnect is the setup. Investors are not ignoring DraftKings because the business has stopped growing. They are worried about valuation, gaming-sector sentiment, and the cost of the company’s push into prediction markets.
Q1 showed real operating progress
DraftKings reported first-quarter 2026 revenue of $1.646 billion, up 17% year over year. The company also swung to net income of $21.1 million, compared with a loss in the prior-year period.
Adjusted EBITDA reached $167.9 million, up roughly 64% year over year. Sportsbook revenue grew 24%, helped by better customer engagement and a stronger sportsbook net revenue margin.
That is the important point. The core business is no longer just a “grow now, profit later” story. The profit is starting to show up.
Full-year guidance stayed intact
Management maintained fiscal 2026 revenue guidance of $6.5 billion to $6.9 billion and adjusted EBITDA guidance of $700 million to $900 million.
That matters because the market is treating the stock like estimates are at risk. For now, management is telling investors the full-year plan still holds.
Why The Business Matters
This is a scaled online gaming platform
DraftKings operates online sports betting, iGaming, daily fantasy sports, digital lottery, media, and prediction markets. The core sportsbook business is already live in 27 states, Washington, D.C., and Puerto Rico, covering roughly 53% of the U.S. population.
The company also operates iGaming in five states, which gives it exposure to a smaller but potentially more profitable market.
The sportsbook engine is still growing
Sportsbook remains the main driver. Revenue grew 24% year over year in Q1, and net revenue margin improved to 7.8%.
That shows the company is not only adding customers. It is getting better at monetizing the activity already on the platform.
That matters because online sports betting can be expensive when companies are fighting for customers.
The bull case depends on DraftKings proving it can keep growing while promotions, product mix, and hold rates become more efficient.
Prediction markets add a new lane
The more controversial part of the story is prediction markets. DraftKings is investing heavily in this area, and investors have not loved the near-term spending. But the opportunity is worth watching.
Prediction markets could expand the company beyond traditional sports betting into events, financial-style contracts, and broader consumer trading behavior.
UBS has argued that customer acquisition costs could be lower in prediction markets than in sports betting, giving DraftKings a chance to add millions of users at attractive economics.
This is not guaranteed. It is early. But it gives the company another way to grow beyond state-by-state sportsbook expansion.
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Why The Stock Has A Case
The valuation is more reasonable than the headline P/E suggests
The trailing P/E looks extreme because net income is still early in the ramp. That is not the best way to value the stock right now.
The forward P/E is closer to 22 times based on the numbers you shared. That is not cheap, but it is much more reasonable for a company expected to grow full-year EPS by more than 70% and revenue by double digits.
Profitability is inflecting
The biggest reason to care is the EBITDA trajectory. DraftKings is guiding for $700 million to $900 million of adjusted EBITDA this year, even while investing in prediction markets and new launches.
That gives investors a clearer earnings bridge. If the core business keeps scaling and prediction-market spending becomes more productive, the market should get more comfortable with the stock.
The stock has already reset hard
DKNG is down meaningfully over the past year and trades far below its highs. That creates a better risk-reward than investors had when the stock was priced for perfection.
This is not a low-risk stock. But the current price already reflects a lot of skepticism around regulation, valuation, and spending.
If the company simply executes against guidance, the stock can recover.
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What Has To Go Right
Q2 needs to confirm the profit story
Investors are looking for Q2 EPS of about $0.34 and revenue of roughly $1.57 billion.
The EPS number is expected to be down year over year, but the bigger issue is whether management can keep the full-year EBITDA target intact.
The market needs proof that prediction-market investments are not overwhelming the core profit ramp.
Customer acquisition needs to stay efficient
DraftKings has spent heavily to build its position. That spending is fine when customer lifetime value is strong. It becomes a problem if acquisition costs rise, promotional intensity returns, or customers become less profitable.
Prediction markets need traction
The company does not need prediction markets to become huge overnight. But it does need evidence that spending is creating real users, real volume, and a credible path to revenue in 2027.
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What Could Trip It Up
Regulation is the biggest wild card
Sports betting and prediction markets both sit in heavily scrutinized areas. State-level rules, tax increases, advertising limits, consumer-protection lawsuits, and federal oversight can all pressure the business.
This is the main reason the stock deserves a risk discount.
Prediction-market spending can frustrate investors
The market wants profit now. Management wants to invest in a new opportunity. That tension can keep the stock under pressure if investors think spending is running ahead of proof.
The gaming industry is out of favor
Zacks currently ranks the gaming industry in the bottom quartile of industries.
That does not break the company-specific thesis, but it explains why the stock has not received much love even after a stronger Q1.
The valuation still needs growth
Even after the selloff, DKNG is not a deep-value stock. The company needs revenue growth, EBITDA expansion, and a cleaner path to sustained net income. If growth slows, the multiple can compress.
What I’d Watch Next
The first thing to watch is full-year adjusted EBITDA guidance. If management keeps the $700 million to $900 million range intact, the profit story stays alive.
The second is sportsbook net revenue margin, because margin expansion is one of the clearest signs the model is scaling. The third is prediction-market spending and volume.
The fourth is any regulatory or tax headlines, especially in large sports-betting states.
My Take
Buy at current levels. DraftKings is not a perfect stock, but the risk-reward has improved.
The core sportsbook business is growing, profitability is finally inflecting, full-year guidance remains intact, and prediction markets give the company a second growth lane that the market is not fully willing to credit yet.
The key risk is execution around prediction markets and regulation. If spending rises without visible traction, or regulators make the category harder to scale, the stock can stay cheap.
But after the reset, DKNG looks buyable for investors who can handle volatility and want exposure to the next stage of online gaming growth.
Action Recap
🎲 Looking to buy? Buy at current levels for a rebound setup backed by revenue growth, improving EBITDA, and prediction-market optionality.
📈 Already own it? Keep holding while full-year guidance, sportsbook margins, and customer growth stay on track.
⚠️ Main risk to respect: Prediction markets and regulation can cut both ways. If spending ramps without payoff, the stock can stay under pressure.
That’s all for today. Thank you for reading. If you have any feedback, please reply to this email.
Best Regards,
— Adam Garcia
Elite Trade Club
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