Is Penn National Gaming a Good Buy?

While it has performed strongly during the COVID-19 pandemic, is Penn National Gaming still a good buy?

With people being forced to stay at home during the COVID-19 pandemic, online gambling activity has grown massively. People could no longer visit physical casino locations. Others who are completely new to gambling got involved as many other entertainment options were taken away from them.

Penn National Gaming (NASDAQ: Penn) has historically been focused on owning and operating casinos and racetracks in North America. However, its move into online gambling has gotten a lot of investors excited.

The bull case for Penn National Gaming

Penn’s origins date back to 1968 and it went public in 1994. Most companies that were heavily involved in the physical casino space saw their share prices decimated in March 2020 as the pandemic set in. The future looked bleak for many as the tourism industry was destroyed in the short term.

Penn had over 40 racetracks and casinos in North America at the start of the pandemic. It also did not have an online gambling presence. However, this changed when it announced its acquisition of a 36% stake in Barstool Sports in January 2020. This $163 million deal for a cut of the sports media company was done with online gambling in mind. Penn’s online casino and sportsbook platforms now use Barstool branding.

Barstool Sports is known for its cult-like following, led by the controversial Dave Portnoy. Its audience fits ideally into the online gambling target market. This relationship has helped Penn’s share price explode from below $12 in March 2020 to over $130 a year later.

One of Penn’s differentiators from other online gambling operators is that it spends little to nothing on marketing costs. For example, DraftKings (NASDAQ: DKNG) spent $499 million last year in sales and marketing costs. This figure is expected to rise significantly in 2021. Despite its lack of advertising spend, the Barstool brand has captured solid market share to date in the states it is operational in.

The bear case for Penn National Gaming

A major concern is that Penn’s future potential is already built into its current price. After such a large jump, this is always something that has to be considered. It is a very trendy sector and some valuations appear to be slightly overinflated.

Online gambling also still only makes up a small portion of Penn’s total revenue. Investors often forget that physical casinos and tracks are Penn’s bread and butter. If this side of the business struggles, it could cancel out much of its online gambling-related efforts. 

Sports betting in particular is a low-margin business. Therefore, it is uncertain as to how much money Penn can make in the sector, particularly if it is not spending big to acquire customers. 

So, should I buy Penn National Gaming stock?

Penn stock has fallen below $100 in recent weeks. After such a meteoric rise, this was not overly surprising. The potential of the ever-growing U.S. online gambling market is also undeniable. 

However, until the Barstool-branded platforms launch in more states and prove their ability to consistently capture significant market share, this is more of a wait-and-see type of stock.

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