DraftKings Q4 Earnings Preview: High Estimates Mask Underlying Volatility and Tax Risks

What happened

DraftKings is scheduled to report its Q4 2025 results on February 12, 2026, with Zacks Investment Research highlighting EPS estimates of $0.50 and revenue growth of 42.9%, focusing on sportsbook and iGaming momentum. However, the DeepValue master report reveals that the company's earnings are structurally volatile, as seen in Q3 2025 when unfavorable NFL outcomes led to a 9.3% drop in sportsbook revenue and a guidance cut for adjusted EBITDA from $800-900M to $450-550M. This momentum is driven by investments in ESPN integration, Jackpocket, and prediction markets, but these initiatives come with high costs and unproven returns, exacerbating margin pressure. Rising gaming taxes, such as Illinois-style progressive levies, increased costs by $402 million in 2024 and threaten to cap long-term profitability despite revenue growth. Consequently, while the market anticipates strong quarterly performance, the underlying financials—marked by negative EPS, high valuation multiples, and net debt—suggest that optimistic estimates should be viewed critically against persistent operational risks.

Implication

The high EPS and revenue estimates for Q4 do not alleviate DraftKings' structural challenges, as outcome-driven volatility can swiftly erode quarterly results, as evidenced by recent guidance cuts. Escalating state gaming taxes, like those in Illinois and New York, are likely to compress margins further, offsetting any revenue gains from sportsbook and iGaming growth. Investments in ESPN and prediction markets must demonstrate measurable improvements in user monetization and cross-sell to justify their costs, but filings show these are still in early stages with uncertain payoffs. At current valuations—P/E of -66 and EV/EBITDA of -58—the stock prices in perfection, leaving no margin of safety if tax hikes or volatility intensify. Therefore, investors should await either a pullback to the $28 attractive entry point or clear evidence of sustained EBITDA margin expansion before considering a position, as the risk-reward remains unfavorable.

Thesis delta

The DeepValue thesis remains unchanged: DraftKings' scale advantages are counterbalanced by earnings volatility and rising tax drag, making the stock unattractive at ~$35.5. The optimistic Q4 estimates from Zacks do not alter this view, as they fail to address the core risks of outcome variance and structural margin compression. Thus, no shift in the 'WAIT' recommendation is warranted, and investors should prioritize monitoring tax trends and EBITDA margins over short-term earnings beats.