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PENN vs. DKNG: Which Stock is a Better Bet?

Barchart - Fri Aug 11, 2023

The contours of the emerging sports gambling space were upended significantly by the pandemic. Thanks to widespread lockdowns and stay-at-home restrictions, the live sports betting industry was dealt a body blow by prolonged closures and shutdowns that impacted everything from March Madness to the Olympics.

However, the industry has gradually regained its mojo in the years since - particularly the offline segment, which was impacted more acutely by the ravages of the pandemic. According to a report by Grand View Research, the growth prospects for global sports betting are robust, with estimates calling for a compound annual growth rate (CAGR) of 10.3% through 2030. Growth in the online market is estimated to outpace the broader sector, with revenue from online sports betting expected to clock a CAGR of 17.33% between 2023 and 2027 to reach $14 billion.

Even Disney (DIS) is getting a piece of the action, as the media and entertainment giant just this week announced a major investment in the sports betting business. But should you follow suit and place your own bet on the sports gambling space? Let's take a look at two leading players to see which stock is best positioned to take advantage of improving trends in the betting industry.

DraftKings

Founded in 2012, Boston-based DraftKings (DKNG) has quickly emerged as a preeminent player in the online sports betting industry, with a 32% market share as of May 2023 - second only to FanDuel. Commanding a market cap of $23.78 billion, DraftKings allows betting across the MLB, NHL, NFL, NBA, the Premier League, and UEFA Champions League, among others.

DraftKings stock has been on a tear in 2023, rising 150.5% year-to-date, and comfortably outpacing the Nasdaq QQQ Invesco ETF's(QQQ) rise of 37.6%.

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For its latest quarterly results, DraftKings posted strong numbers. In the second quarter, the company reported revenues of $874.9 million - denoting a solid yearly increase of 87.7%, and well above the consensus estimate of $762.2 million. Losses also narrowed to $0.17 per share from $0.50 per share in the previous year, which bested the consensus estimate for a loss of $0.24 per share.

The company has now recorded rising revenues for the past four quarters, while earnings have surpassed the Street's estimates on four occasions out of the last five.

In terms of operations, DraftKings showed an improvement in both average monthly unique payers (MUP) and average revenue per MUP when compared to the year-ago period. Average MUP came in at 2.1 million for the June quarter (up 40% YoY), and average revenue per MUP gained 33% from the prior year to $137.

DraftKings raised its revenue guidance for FY 2023, too. The company now expects revenue to range between $3.46 billion and $3.54 billion, up from its prior guidance of $3.135 billion to $3.235 billion.

Analysts also appear optimistic, as they're estimating healthy earnings growth for the next quarter, as well as for FY 2023. For the December quarter, earnings are expected to grow by 115%, while for FY 2023, EPS growth is targeted at 49%.

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Overall, analysts remain generally bullish about the stock, judging by the overall rating of “Moderate Buy” with a mean target price of $32.96 - indicating upside potential of about 15.2% from current levels. Out of 25 analysts covering the stock, 18 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, 5 have a “Hold” rating, and 1 has a “Strong Sell” rating.

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Penn Entertainment

Founded in 1982, Penn Entertainment (PENN) has been operating in the betting industry for decades. The company has a presence in both the online and offline segments, with its 43 properties spread across 20 states. Penn commands a market cap of $3.87 billion, and its portfolio includes popular brands like Hollywood Casino, Ameristar, and Boomtown.

Unlike DKNG, the stock has had a disappointing run in 2023 so far. PENN is down more than 21% since the start of the year, which compares unfavorably not only to DKNG, but also to the broader QQQ. 

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That said, the company's recently announced second-quarter resultssurpassed Wall Street's expectations. Penn Entertainment clocked revenues of $1.67 billion in the April-June period, up a modest 2.9% from the prior year. That year-over-year improvement was driven almost entirely by gains in the Interactive segment, as key revenue segments in the South, West, and Midwest acted as a drag for revenue growth, with muted gains in the Northeast. 

However, EPS jumped substantially year-over-year, up 220% to $0.48 from $0.15. Penn has topped bottom-line estimates three times over the past five quarters, with results over this period ranging widely from a loss per share of $0.15 to EPS of $3.05.

However, it's PENN's latest partnership that's generating headline buzz for the company. Just a few days ago, the company entered into a $2 billion deal with Disney's ESPN to rebrand its Barstool Sportsbook as ESPN Bet. The pact will run for a decade, and Penn will pay $1.5 billion for the licensing deal, along with granting rights of about $500 million to purchase shares in Penn. In turn, ESPN will allow PENN to operate ESPN Bet and will allow “unspecified access” to ESPN talent. (Notably, the deal also allowed Barstool founder Dave Portnoy to buy back his company from Penn, subject to non-compete terms and various other restrictions.)

As these events unfold, analysts' opinions about Penn Entertainment's growth prospects remain mixed. Wall Street expects earnings to decline by 44.4% in the September quarter, followed by 238% growth in the fourth quarter. 

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Overall, analysts have recommended a "Moderate Buy" rating on the stock, with a mean target price of $34.50, indicating upside potential of about 48% from current levels. Out of 14 analysts covering the stock, 5 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 8 have a “Hold” rating.

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Valuation

In terms of valuation, Penn Entertainment looks more reasonably priced than DraftKings - which may come as no surprise, given the major divergence in the share price performance so far this year.

DraftKings is currently trading at a price-to-sales (p/s) ratio of 4.27 and price-to-book (p/b) ratio of 12.85. Both metrics are significantly higher than Penn Entertainment's p/s of 0.64 and p/b of 0.99.

Final Takeaway

The betting space, especially on the online front, is expected to witness considerable growth in the years to come, judging by industry data and forecasts.

Within this space, I believe that DraftKings will surge ahead of its peers, including Penn Entertainment. As stated above, DraftKings has a sizeable market share in the growing online sports betting space, with a robust sportsbook app. Continued rising revenues, narrowing losses, and growth in some of the key operating metrics give it a solid footing to further build its dominance in this space.

On the other hand, Penn Entertainment is lagging behind its upstart rival. It has re-launched its sportsbook app, but I think it will be some time until it challenges DraftKings' position. Moreover, I remain of the opinion that Penn came up short in its deal with ESPN, where it has to pay a significant amount (albeit dispersed over a ten-year period) in exchange for what seems to be nothing much in return. 

In fairness, Penn's decades of experience and strong presence in the offline space, with properties across the country, may give it a slight edge. On top of that, the company is profitable, and its valuation appears to be relatively attractive. Nevertheless, modest revenue growth and lack of dynamism in its operations stick out as headwinds for future growth.

Consequently, DraftKings would be my top gambling stock to bet on for investors who are looking to ride the growth of this rising industry.


On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.