Daily Fantasy Sports games may be ruled illegal in California

California is reportedly on the verge of a major regulatory shift, as Attorney General Rob Bonta is expected to issue a legal opinion declaring that all forms of Daily Fantasy Sports activities are illegal in the state. The development would force major DFS operators such as FanDuel (NYSE:FLUT), DraftKings (NASDAQ:DKNG), PrizePicks, and Underdog to cease operations in the largest U.S. market for fantasy sports

For years, the daily fantasy sports business has operated in a legal gray zone in California, neither explicitly permitted nor banned. That ambiguity allowed platforms to thrive without regulation or taxation. In general, daily fantasy sports is not generally considered sports betting under U.S. federal law and in most states. The determining factor rests on whether DFS is classified as a game of skill or a game of chance.

Mizuho Securities Ben Chaiken weighed in on the potential impact for DraftKings (NASDAQ:DKNG) of a DFS rulings in California. “For context, we believe DKNG should generate DFS revenue of ~$225m in FY25, with $40m to $50m generated in California. Assuming a contribution margin of 60% to 65% vs DKNG overall of ~31% to 32% in FY25 (given limited external marketing spend, limited/no platform fees, etc), that would imply contribution profit of ~$25m and EBITDA of around ~$15m,” updated Chaiken. He also observed that the DFS segment for DKNG has been in somewhat of a decline, from competitive pressures related to PrizePicks and Underdog Fantasy.