(Previous post was deleted due to outside link.)
I believe that PENN is building a flywheel that will allow them to compete with DraftKings and FanDuel at the top of online sports betting in the US and Canada. The funds from their legacy casino business allow them to invest in the growth project of ESPN Bet, where they leverage the social reach, ecosystem, and integration of ESPN to make OSB mainstream.
**First, how are things trading (as of yesterday):**
|Company|PENN|DKNG|MGM|FLTR.L|
|:-|:-|:-|:-|:-|
|Revenue – TTM|6.55B|3.29B|15.38B|9.11B|
|Gross Margin – TTM|2.71B (41%)|1.23B (37%)|7.35B (47%)|5.31B (58%)|
|EBITDA – TTM|0.98B (15%)|-0.86B (-26%)|3.64B (23%)|1.27B (14%)|
|Free Cash Flow – TTM|0.34B (5%)|-0.35B (-10%)|1.49B (9%)|0.58B (6%)|
|**Market Cap**|**3.36B**|**19.86B**|**15.28B**|**29.19B**|
To me, PENN is wildly under priced especially compared to DraftKings. It has 2x the revenue, a higher gross margin (than an online only operator…), and about $1B more in EBITDA, yet DKNG’s market cap is trading 6x higher…
PENN also has a 11.33% Short Interest of outstanding shares which is just about 3x higher than the average of DKNG, MGM, CZR, FLTR, WYNN, BYD, and RRR. PENN is the highest % of the group (DKNG is next at 5.44%, yet it’s financials aren’t as strong)…
**Recent News of ESPN and PENN:**
Bob Iger (DIS/ESPN), during interviews and their earnings call, mentioned that they view ESPN as a foundation of their business. More importantly, they are planning to launch a standalone ESPN app “in probably August of ’25” before the football season with ***”integrated betting, integrated fantasy…”*** They are obviously also doing the JV with Fox and WB Discovery which means more eyes on ESPN and more potential eyes on ESPN Bet.
To me, Iger is seeing ESPN as a long term opportunity in the growing sports and sports betting category. That means PENN wins. Don’t forget, ESPN and DIS have “$500 million of warrants to purchase approximately 31.8 million common shares of Penn. There are options to receive bonus warrants depending on the performance of ESPN BET.”
Who would ESPN rather promote, their own platform or someone elses? While DraftKings and FanDuel have to pay millions to advertise, PENN and ESPN have developed a strategy that lowers that marketing cost over the long term.
**Ok, how’d the Launch go?**
The lazy answer is we will find out this Thursday during earnings on 2/15. But I’m not here to be lazy…
States report betting revenues independently, so in prep of PENN’s earnings next week I tracked their handle sizes over the past 24 months in the states that show online sports betting by operator. I wanted to get an idea of market share changes over the past two years and most importantly, how market share has changed since the launch of ESPN Bet.
For some reason I cannot post the charts here, but maybe I can in the comments. Nonetheless, PENN has dominated the launch. Their QoQ growth in Q4 2024 across IL, IN, IA, MD, KS, NJ, OH, and PE (combined handles) was over 150% when compared to Q3 2023. In each market except New Jersey they are either tied or have surpassed the 3rd largest operator behind DKNG and FanDuel.
This is crazy considering ESPN Bet launched on Nov 14th, halfway through Q4 and PENN mentioned they did not do any advertising in Oct. since they were under the Barstool name and were rebranding the next month to ESPN.
**So in 1.5 months, they were able to grow their entire QoQ handle in these markets over 150%…**
Now this isn’t the full story as only a few states they operate in show these figures, and handle is not technically the revenue of the company, but it is a good idea of the market share growth which is what everyone is wanting to see. We will know the real numbers in 6 days.
**But I don’t like the app**
Boo, don’t care. Short term UI/UX problem that can be solved over time. Facebook was trash early on, so was everything. DKNG and FanDuel’s apps were probably trash to begin with. If you want big returns, don’t freak out about solvable problems in the short term…
**In conclusion…**
To me, PENN has way more room to run than DraftKings and FanDuel considering they have been a small operator, in fewer markets, in a quickly expanding industry with strong momentum. Portnoy even mentioned that Barstool’s reputation made it hard for PENN to navigate the regulated industry and potentially land new licenses.
PENN “failed fast” with that poor partnership and is now on the coattails of a \~200M user (and 12M in their fantasy app) behemoth in ESPN that is actively looking to get sports betting integrated deeper into it’s ecosystem over the long term…
Currently I have $10.4K in long positions (I see this mostly as a multi year growth play) and \~$6K in Call Options that have been pummeled since I first invested… but today they’re doing well.
Poke holes in this thesis please.
