Following Wall Street financial giant Bank of America's unexpected downgrade of online sports betting operator stocks, shares of both major U.S. online gambling giants, DraftKings Inc. (DKNG.US) and Flutter Entertainment Plc (FLUT.US), fell sharply. Bank of America attributed the core reason for the downgrade to multiple risks facing the gambling market, including the increasing global prevalence of prediction markets like Polymarket. DraftKings and Flutter may lose their luster in the new wave of "betting" trends.

It is understood that a team of Bank of America analysts led by Shaun Kelley downgraded the stock ratings of DraftKings and Flutter from "Buy" to "Neutral," expressing concerns over the so-called "structural hold" (i.e., the implied win rate that should apply to specific betting combinations) and significant pressure from the long-term headwind of taxation. Regarding the threat posed by paid prediction markets, Bank of America stated that as business models continue to evolve, resistance is likely to emerge, and this headwind could become the biggest constraint.

"The near-term event path for prediction markets is very challenging, with competitive marketing and the possibility of a full-scale price war on the rise, while the decisions of online sports betting (OSB) operators are strictly limited by regulatory and legal actions," said Kelley, a senior analyst at Bank of America.

Prediction markets are becoming increasingly popular among gamblers. Platforms like Kalshi Inc. and Polymarket, which require real money for paid bets, allow people to place wagers on the outcomes of various major events such as sports matches, the New York City mayoral election, and the Nobel Peace Prize. In late September, Robinhood Markets, the most popular retail brokerage platform in the U.S., as well as the well-known prediction platform Kalshi, reported a surge in prediction market betting volumes. Even former U.S. President Donald Trump's social media company has begun participating. In recent years, capital markets have been highly sensitive to this new paid prediction track, ultimately putting long-term pressure on the valuation and business models of the traditional gambling industry.

The rise of prediction markets has caused DraftKings and Flutter to underperform the S&P 500 index.

DraftKings' stock closed down 6.4% on Tuesday, having hit its lowest level in over two years during the session. Meanwhile, Flutter's stock fell 3.9%. The significant threat posed by prediction markets like Kalshi Inc. and Polymarket has prompted investors to sell off these gambling operator stocks aggressively, with both companies' shares experiencing a downward trend for several consecutive months.

Bank of America analyst Kelley said, "Unfortunately but not unexpectedly, OSB operator stock values have now begun to react negatively to major prediction market-related announcements." He added that he sees substantially higher risks ahead, including the launch of some major features by Polymarket in the U.S., a new round of large-scale financing for Kalshi, and new entrants from both traditional finance and the cryptocurrency space joining the online gambling competition.

Kelley believes that although DraftKings and Flutter's FanDuel have not yet seen any "cannibalization"现象, he expects the next phase of prediction markets to bring headwinds in terms of news flow and business models.

"In the absence of clear legal solutions, the event path and unit economics of prediction markets could become a significant悬念 in our coverage universe over the next 6 to 9 months, and even years," Kelley and other Bank of America analysts wrote in a report released on Tuesday. "We expect more negative news on the announcement and competition fronts, and potentially some mixed news as U.S. regulatory and legal developments remain volatile."

DraftKings and FanDuel have been striving to enter the prediction market—the former acquired Railbird Technologies Inc., a exchange licensed by the U.S. Commodity Futures Trading Commission (CFTC), and the latter established a partnership with CME Group Inc. However, Kelley warned that the current legal environment makes it difficult to calculate specific risk-reward ratios.

"With federal and state-level cases still moving through the courts, state regulators in Nevada, Illinois, Ohio, Michigan, and Arizona appear to be 'boxing in' traditional gambling operators, thereby ceding advantages to disruptors and new entrants. We believe this is also a response to recent related announcements," Kelley said.

DraftKings is scheduled to release its third-quarter earnings after the U.S. market closes on Thursday. Flutter plans to report its third-quarter financial results on November 12th.