Prediction markets were once a threat to DraftKings. Now Bank of America says the rapidly growing platforms might be a "win-win" for the online betting firm.

DraftKings shares jumped more than 8% on Monday after Bank of America analysts upgraded the stock to Buy from Hold, noting that the company's own prediction market offering is gaining traction. Bank of America has a $27 price target on DraftKings shares, implying 35% potential upside from their current price around $20.

DraftKings could certainly use the boost. Its revenue declined 4.6% year over year to $1.44 billion in its second quarter. DraftKings stock has sunk around 42% this year, while Flutter -- the parent company of DraftKings' closest competitor, FanDuel -- has seen its shares plummet 65%.

As Barron's has written, the U.S. sports betting industry may be running out of steam after enjoying years of growth, amid rising tax rates and plateauing betting handle, or total dollars wagered. But much of the stock's selloff was sparked by the advent of prediction markets, which provide event contracts that are legal across the country to anyone over the age of 18.

Those contracts can be tied to the outcome of sporting events -- effectively enabling sports betting in states that haven't legalized it, such as Texas and California. That broader access sparked concerns that prediction markets would steal away market share from traditional online sports betting operators. DraftKings and FanDuel launched their prediction markets to compete.

Bank of America analysts Julie Hoover and Shaun Kelley wrote Monday that fears of cannibalization appear to be overblown. They note that consumer trading volume growth on prediction markets has lagged behind sportsbook handle growth, suggesting sports bettors prefer a sportsbook experience.

In fact, prediction markets could be a "greater opportunity than threat," they say. DraftKings' prediction market offering has begun to pick up steam. It saw record trading volume of $218 million on Sunday Oct. 4, according to Aldrin Research, up about 56% from the first NFL Sunday on Sept. 13. Those numbers put it in a comfortable number-three position behind prediction markets Kalshi and Polymarket.

The analysts estimate DraftKings can generate about $400 million from prediction market fee revenue in 2027, and another $200 to $400 million from market-making.

Market-making on prediction markets has emerged as a major upside for sports betting operators. On prediction markets, traders face off against other traders in a peer-to-peer market, as opposed to a sportsbook model where customers bet against the proverbial house. Barron's reported last month that FanDuel has been market-making on Kalshi, essentially taking the other side of traders' positions on the platform.

Most of the market-making is in combo trades, where multiple discrete bets are linked together; those trades see a massive payout if each bet proves correct. Combos have inherently long odds for the bettors, so FanDuel and other market-makers on the platform compete to take the other side of the trades.

Prediction markets tied to sports face significant legal challenges, and the booming sector could be cut off at the knees by a Supreme Court ruling. But Bank of America says that wouldn't be bad for DraftKings, either: "If PMs go away, the terminal value overhang is removed, supporting a higher multiple."