Hook & thesis
DraftKings has had its share of headline-driven volatility, but the business underneath matters: it is generating strong top-line dollars, meaningful gross profit, and real operating cash flow while adding product lines (DraftKings Predicts) that can change the multiple investors are willing to pay. The Q3 2025 print (filed 11/07/2025) looks like the kind of ‘proof’ investors need to stop penalizing the shares for historical losses and start paying for growth plus improving free cash generation.
My trade idea: take a tactical long position in DKNG on a controlled pullback around current levels with a stop that respects the company’s seasonality and balance sheet. This is a swing-to-position trade (3-6 months) that assumes the market re-rates if product launches and seasonal revenue inflections continue to show improving margins and recurring cash flow.
What DraftKings does and why the market should care
DraftKings began as a daily fantasy operator and today is a diversified digital-gambling platform: mobile and retail sports betting (live in 28 states), i-gaming (live in 5 states), fantasy and lottery. In 2024 the mix was ~61% sports, ~32% i-gaming, and ~7% fantasy/lottery. The important structural point is product mix matters: i-gaming generates higher gross margins than sports, so launches or market share gains in igaming show up as outsized profit improvement.
The company is launching a predictive event platform (DraftKings Predicts) late 2025. If DraftKings can position Predicts as a high-frequency, low-acquisition-cost engagement product (think recurring micro-transactions and higher lifetime value), that alone could justify a multiple expansion—even before further state expansions.
Key fundamentals from recent quarters
- Q3 2025 (period ending 09/30/2025, filed 11/07/2025): revenue $1,144,019,000; gross profit $359,940,000 (gross margin ~31%); operating loss -$271,890,000; net loss -$256,788,000; diluted EPS -$0.52; operating expenses $631,830,000.
- Q2 2025: revenue $1,512,507,000; gross profit $657,948,000 (gross margin ~43%); operating income $150,644,000; net income $157,936,000; diluted EPS $0.30.
- Q1 2025: revenue $1,408,806,000; gross profit $565,003,000; operating expenses $611,334,000; net loss -$33,864,000.
- Cash generation: Q3 2025 net cash flow from operating activities was $287,477,000 (positive), and net cash flow for the quarter was $144,233,000. Q2 also showed positive operating cash flow ($173,921,000). These are concrete signs the company is moving toward consistent cash generation despite GAAP volatility.
- Balance sheet snapshots: total assets $4,624,235,000; liabilities $3,891,949,000; equity $732,286,000; intangible assets $861,041,000 (Q3 2025).
Put plainly: revenue and gross-profit profiles are large and platform-driven; the swing from Q2 to Q3 in margins highlights seasonality and mix sensitivity, but positive operating cash flow in multiple recent quarters is the single biggest near-term structural improvement.
Valuation framing - approximate and pragmatic
A current reference price is the prior close of $32.62. The company reported a diluted average share count in Q3 2025 of 496,639,000 shares. Using that share count and the recent close gives an illustrative market cap of ~ $16.2 billion (496.639M shares * $32.62 ≈ $16.2B). This is an estimate - the dataset did not list a contemporaneous market cap value, so this uses reported diluted shares and the prior close.
Estimate LTM revenue: sum of the three most recent quarters (Q1 + Q2 + Q3 2025 = $4.065B) annualized (4/3 factor) gives an approximate LTM run-rate near $5.4B. Using the ~$16.2B market cap gives an estimated multiple ≈ 3.0x revenue. For a scaled digital leader with improving cash flow and new product optionality, a mid-single-digit revenue multiple is not aggressive relative to many software/adjacent consumer platforms; the question is whether Predicts and mix improvement push multiples higher.
Catalysts (what could re-rate the stock)
- DraftKings Predicts rollout - late 2025. A clean launch with strong engagement metrics (DAUs, ARPU lift, low churn) could change investor perception from a pure gaming platform to a broader 'engagement + monetization' business.
- Further i-gaming market entries or share gains in existing i-gaming states - this product is margin-accretive relative to sports.
- Q4 / full-year 2025 results and guidance - if operating cash flow and adjusted operating margins continue to improve, multiple compression risk fades.
- Regulatory clarity or favorable state rulings that increase addressable market - consistent state additions expand long-term TAM.
Trade plan (actionable)
Trade direction: Long
Time horizon: Swing (3-6 months), can be carried as a position if Predicts shows traction
Risk level: Medium-High (regulated business + product/seasonality risk)
Entry: 31.00 - 33.50 (scale in / stagger entries across this band)Stop-loss: 27.00 (hard stop; limits downside to roughly 17% from a 32.50 average entry)Target 1 (near): 40.00 (~+22% from 32.75)Target 2 (stretch): 50.00 (~+53% from 32.75) - reserved for substantial positive catalysts (Predicts adoption, margin beat)Position sizing: limit initial position to no more than 3-5% of portfolio; add on confirmation (Q4 results, Predicts KPIs). Use the stop to keep downside defined - this name can gap on headlines.
Risks and counterarguments
There are several valid reasons the market could continue to punish the stock:
- Regulatory risk: Online gambling is highly regulated and state-by-state. Adverse regulatory moves or higher-than-expected taxation/fees in key states would compress margins and slow growth.
- Profitability volatility: The company swings from profitable quarters (Q2 2025 net income $157.9M) to large GAAP losses (Q3 net loss -$256.8M). Investors sensitive to EPS volatility may sell on any return to loss-making quarters.
- Competition and acquisition costs: FanDuel (and other operators) remain fierce competitors. If marketing spend or promos need to jump to defend share, adjusted margins could come under pressure.
- Balance-sheet/leverage & goodwill/intangibles: DraftKings carries sizeable liabilities ($3.89B) and intangibles ($861M). If growth slows, impairment risk could hit equity.
- Product execution risk: Predicts is strategic, but if adoption is weak, the expected re-rating won't happen and investors could re-price the stock lower.
Counterargument: the company already shows a path to cash generation. Two consecutive quarters of substantial positive operating cash flow (Q2 $173.9M; Q3 $287.5M) suggest the platform can fund its own growth and reduce headline risk. If Predicts drives higher engagement and monetization, the multiple can expand and offset regulatory/competitive headwinds.
What would change my mind?
I would reduce conviction or flip to a cautious stance if any of the following materialize:
- Q4 / FY2025 results show a meaningful decline in operating cash flow or a reacceleration in operating expenses without clear product-driven ROI.
- Predicts rollout data (engagement and monetization KPIs) disappoints relative to management’s early-stage targets or guidance.
- Regulatory developments raise the effective tax/fee burden in more than one major state, materially reducing long-term margins and TAM.
Bottom line
DraftKings is not a soft, speculative story anymore - it is a scaled, revenue-generating platform with improving operating cash flow and an imminent product launch (Predicts) that could materially change monetization. At an illustrative ~3x estimated revenue run-rate and a prior close near $32.62 (implied market cap ≈ $16.2B using diluted shares of 496.639M), the stock looks buyable on a disciplined, defined-risk basis. Take a scaled long in the 31-33.50 band, keep a hard stop at $27, and look to upgrade the position only after predictable signs of Predicts adoption or another quarter of operating cash-flow strength.
If you take this trade, treat position sizing and stops as primary risk controls. This is a binary-ish risk/reward: product execution and seasonality will drive sentiment. But the fundamentals - meaningful revenue scale and recent cash flow positive quarters - give me confidence the market should (and likely will) have some faith in the shares again.
Disclosure: This is a trade idea and not personalized financial advice.