Penn Stock Is Flying Too High

[Updated 3/23/2021]

The shares of Penn National Gaming (NASDAQ: PENN) have been racing ahead since early March, primarily propelled by the launch of Barstool, the company’s sports betting application, in New York and Illinois. The application is slated to be launched in ten states by the end of 2021 and currently ranks third by total handle in Pennsylvania. Notably, the U.S. sports betting and iGaming industry is expected to reach $40 billion at maturity and New Jersey, Nevada, and Pennsylvania are prominent hubs. Comparing the gains in Penn’s market capitalization with Wynn Resorts, Trefis believes that the stock looks overvalued in view of downside risk from high competitive rivalry and bargaining power of customers. We compare the historical stock price trends between Penn and its competitors including Wynn and MGM in an interactive dashboard analysis, PENN Stock Has Underperformed Peers In The Past Month.

Wynn Resorts earns 85% of casino revenues from Macau, which is also a $40 billion industry, and its stock has a current market capitalization of $16 billion. With an 85% revenue contribution from Macau, the market value of Wynn’s Macau business is roughly $13 billion (85% of $16 billion). As Wynn commands roughly 10% share of the Macau Gaming Market and the market value of Wynn’s Macau business is lower than the $16 billion gain in Penn’s market capitalization since February 2020, the market seems too optimistic on Barstool’s long-term success. Interestingly, Penn’s competitors Draft Kings and MGM Resorts are targeting a 15-20% share of the U.S. sports betting and iGaming industry – indicating the likelihood of strong competitive rivalry. (As Wynn and Penn have a net debt of $10 billion, therefore, we have compared market capitalization instead of enterprise value).

[Updated 1/29/2021]

Over the last twelve months, Penn National Gaming, Inc’s (NASDAQ: PENN) market capitalization has increased by 340% from $3.8 billion to $17 billion at present, primarily led by the strong success of its sports betting application Barstool. In Pennsylvania, the company launched its Barstool Sportsbook in September 2020 and currently ranks third by total handle (total amount of money wagered by bettors). Pennsylvania accounts for almost 25% of the U.S. sports betting market followed by Nevada and New Jersey. Triggered by the launch of Barstool in Michigan and the ongoing sports betting frenzy, Penn stock rallied above $100. However, Trefis believes that the stock is overvalued given the steep rise in P/S multiple, growing competition for market share, and a likelihood of macroeconomic sluggishness during the early part of 2021. We highlight the historical trends in Penn National Gaming’s revenues, earnings, and stock price in an interactive dashboard analysis, Why Penn National Gaming Stock Has Gained 481% Between 2018-End And Now?

Penn’s revenues can double with a 15% sports betting and iGaming market share

With an 80% contribution by the gaming segment, Penn generated $5.3 billion of total revenues in 2019. The company is highly dependent on slot handle, which generates a casino win rate of around 7%. Considering a comparable win rate and $5 billion of additional revenue by the sports betting application Barstool, the monumental rise in the stock price looks unwarranted. Notably, MGM Resorts and Draft Kings, Penn’s immediate competitors, are also eyeing a 15-20% share of the sports betting and iGaming market. With the approval of other sports betting applications across the country, Penn is likely to face stiff competition for market share and earnings. Thus, we believe that the stock price is stretched with the strong likelihood of a correction.

Overview of Sports Betting Industry

After the Supreme Court overturned the Professional and Amateur Sports Protection Act (“PASPA”), the sports betting and iGaming industry went live in 25 states. Currently, Nevada, New Jersey, and Pennsylvania account for almost 75% of the sports betting handle. At maturity, the sports betting and iGaming industry is likely to reach $40 billion in the U.S. and $70 billion globally. Thus, multiple sports betting applications, including FanDuel, bet365, Hardrock Café, BetMGM, and William Hill, are eyeing a sizable share of the pie.

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