The sportsbook operator DraftKings' shares could recover from a steep decline if the U.S. court system rules against prediction markets in coming months, Mizuho says.

Sports-betting companies have seen their stocks slide over fears of competition from prediction markets. DraftKings stock has tumbled 44% over the past year, while Flutter, the parent-company of DraftKings' closest competitor, FanDuel, is down 65.5%

By offering federally-regulated event contracts that, for example, pay out if the Seattle Seahawks win the Super Bowl, prediction-market operators can provide what is effectively sports betting to anyone over the age of 18 in all 50 states-including Texas, California, and others that haven't legalized traditional sports betting.

Dozens of legal challenges to the prediction markets have emerged, with state attorneys general arguing that gambling has traditionally been under the authority of state gambling regulators.

Analysts led by Ben Chaiken, Mizuho Americas' equity analyst covering the gambling industry, examined 23 recent court decisions in a Monday note and determined that courts are siding with states more often than not. Fewer than a third ruled in favor of the prediction platforms.

"Several of the decisions that did side with the predictions essentially won on technicality, not on merit," the analysts wrote.

Prediction markets' legal argument is that their federal regulator, the Commodity Futures Trading Commission, has exclusive jurisdiction over event contracts, even those tied to sporting events. The CFTC has joined the fight, siding with prediction platforms and suing state regulators.

The sheer number of lawsuits currently working their way through the legal system makes it probable that two or more U.S. Courts of Appeals will come to different conclusions. If that happens, the Supreme Court is likely to step in, which the analysts believe will be a positive catalyst for DraftKings stock.

Wall Street's punishment of sports-betting stocks was based on the assumption that prediction markets would steal market share from sportsbooks. But DraftKings says those concerns have proven wrong.

"There is no discernible impact from prediction markets on our sportsbook revenue," CEO Jason Robins wrote in his letter to shareholders when the company reported second-quarter earnings this month.

Mizuho says the market has yet to give DraftKings credit for that or take into account the favorable court decisions.

"If the [prediction market] overhang is removed, we expect DKNG shares could move substantially higher, as investors are able to have greater clarity in a longer term investment horizon," the analysts wrote.

In a June cover story, Barron's reported that the U.S. sports-betting sector faces headwinds beyond prediction markets. Handle, or total dollars wagered on sports, has plateaued after years of strong growth. Betting fatigue is on the rise-and so are tax rates.

DraftKings and Flutter's investments into their own prediction markets have also weighed on guidance. A Supreme Court decision that removes the competitive threat of prediction markets will render those investments moot, and won't change the traditional sports-betting landscape.

And it's hard to know just what the nine justices, six conservative and three liberal, will decide.

"Will the Supreme Court rule in favor of sports prediction markets?" is one of the few questions that prediction platforms aren't taking bets on.