Why Penn National Gaming Stock Looks Pricey

December 24th, 2020 by Trefis Team
PENN: PENN Entertainment logo
PENN
PENN Entertainment

The shares of Penn National Gaming (NASDAQ: PENN) have more than doubled since February highs primarily due to the strong success of its Barstool Sportsbook App, which has become the most downloaded sports betting application in the country. In October, the application received $48 million of total handle and generated $3.1 million in net gaming revenue – indicating a casino win rate of 6.5%. Considering Barstool achieves a 15% share of the $40 billion sports betting and iGaming market at maturity, Penn’s top line can double in the long run. However, Trefis believes that Penn stock is a risky bet at current levels as conventional casinos along with newer entrants are eyeing a sizable share of this budding industry. 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 392% Between 2018-End And Now?

Overview of sports betting and iGaming market

In 2018, the Supreme Court overturned the Professional and Amateur Sports Protection Act (“PASPA”) that had prevented legalization of sports betting activities in the U.S., apart from certain states. Subsequently, 18 U.S. states, the District of Columbia, and Puerto Rico passed laws to legalize some form of sports betting and iGaming activities by December 2019. Currently, sports betting is live and legal in 25 states with ongoing legislation in 5 more.

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The sports betting & iGaming industry is likely to reach $40 billion in the U.S. and $70 billion globally at maturity. Due to the ongoing accelerated growth, the nascent industry is getting populated by prominent names including Fanduel, bet365, HardRock Café, BetMGM, and William Hill.

At 15% market share, Penn stock has reached its near-term potential

In 2019, Penn generated $5.3 billion of total revenues with an 80% contribution by the gaming segment. Interestingly, the company’s gaming revenue is highly dependent on slot machines, which has a casino win rate of around 7% – comparable to the win rate earned by the sports betting application Barstool. Thus, the earnings margin of the sports betting segment can be compared to the company’s existing margins.

Penn’s competitor, Draft Kings, expects to attain a 20-30% share of the $21 billion sports betting market (including states where legislation is ongoing) and 10-20% of the $18 billion iGaming market at maturity. Thus, Draft Kings’ Revenues could reach nearly $6 billion in the long run. Considering a similar 15% market share for Penn’s Barstool Sportsbook App, Penn National’s Revenues can double to $10 billion as the market expands. However, Penn stock has more than doubled gaining nearly 145% since February highs and we believe the stock price is stretched with a likelihood of a correction as Penn faces stiff competition from other sports betting applications.

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