The sports betting industry continues to flourish, as the recent Super Bowl has demonstrated. Nevada sportsbooks broke new records for the Chiefs vs. 49ers overtime championship, and online gambling activity surged year-over-year. Sports betting stocks spiked, too - only for some of the biggest names in the group to sell off shortly after, in the wake of their respective earnings reports.
With more states giving sports betting the thumbs-up, we're seeing a real battle royale shape up among the big players in the industry. And now, with March Madness around the corner — a time when gambling activity is likely to skyrocket — the winners and losers are beginning to emerge.
The Case for Penn Entertainment Stock
Penn Entertainment Inc. (PENN) has expanded from its start in the gaming and racing industry to the rapidly growing sports betting market. With a rich portfolio that spans gaming, racing facilities, and online gaming operations, PENN is not just participating in the sports betting revolution; it's leading the charge. Their innovative online sports betting platforms are crafted to help immerse and engage sports fans.
While the broader market has moved higher in 2024, PENN stock has taken a turn for the worse, down 34.4% YTD. Quite a bit of that downside was triggered by the company's latest earnings report, which wasn't well-received by investors.
PENN dropped sharply on Feb. 15 after reporting Q4 revenue that fell short of estimates, as well as a wider-than-forecast per-share loss. Management chalked up the disappointing results to heavy investments in its digital business, which is in the process of rebranding from Barstool to ESPN Bet under a new partnership with Disney (DIS).
While the unwinding of its business relationship with Barstool boss Dave Portnoy has been unpleasant for investors, the stock does look cheap at current levels. PENN is priced at 0.36x forward sales, just a fraction of its 5-year historical average of 1.24. This does suggest PENN could be undervalued around current levels, based on its growth prospects. If the business executes well and markets stabilize, the stock could be a potential bargain right now.
Plus, the company is planting a major flag in New York, which is the biggest game in the online sports betting market, via the purchase of mobile sports wagering licenses from Wynn Interactive Holdings. They're also looking to enter the North Carolina market by March - two moves that should increase their total addressable online sports betting market to 46%.
Among the 16 analysts in coverage, PENN has a “moderate buy” rating, based on a mixed bag of 5 “strong buys,” 1 “moderate buy,” and 10 “holds.” The mean price target is $29.25, representing expected upside of 71% from Friday's close.
The Case for DraftKings Stock
DraftKings Inc. (DKNG) is a digital sports entertainment and gaming company that's been making waves in the online sports betting industry. Known for its daily fantasy sports contests and sports betting platforms, DraftKings has become a go-to destination for bettors looking to engage with their favorite sports dynamically and interactively. The company's commitment to providing an immersive betting experience has positioned it as a key player in the sports betting sector.
DKNG definitely outperforms PENN when it comes to price action, up an impressive 17% so far in 2024.
That's even after accounting for DKNG's own post-earnings pullback, as the stock is now down more than 7% since reporting a mixed set of Q4 results on Feb. 15. Despite issuing 2024 revenue guidance of $4.65 billion to $4.90 billion - which topped expectations at the midpoint - DKNG closed nearly flat the day after the report.
And DKNG's valuations still appear stretched, at 4.04x forward sales. The high growth does justify some premiums, but investors should be cautious not to overpay - particularly given the stock's tepid earnings reaction.
While PENN is eyeing New York, DraftKings recently announced the acquisition of lottery app Jackpocket for a cool $750 million. This move is a clear signal of DraftKings' ambition to diversify its offerings and tap into new markets. Notably, DKNG also entered a multiyear betting partnership deal with Barstool Sports.
Analysts remain firmly bullish on DKNG, which has a consensus rating of “strong buy” on Wall Street. Out of 27 analysts, 22 have a “strong buy” rating, 2 call it a “moderate buy,” 2 say “hold,” and there's only 1 “sell” recommendation. The mean target price of $44.35 indicates a modest 7% upside from Friday's close.
Which Stock Is a Better Buy?
There's no doubt that DraftKings (DKNG) is killing it in digital gaming and sports betting - but Penn (PENN) has some winning moves that shouldn't be overlooked, including the incredible reach and branding that comes with ESPN and Disney. While the price action in PENN may not be as flashy amid its pivot away from Barstool, the stock's attractive valuations and upside potential make it a more compelling buy at current prices than DKNG.
On the date of publication, Ebube Jones 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.
