Description

Penn National Gaming (NASDAQ: PENN)

Business Overview: Penn National Gaming owns and operates gaming and racing assets across the United States, currently totaling 42 properties in 20 states. Their core business is primarily focused on slot machine entertainment and other casino operations and are currently the largest regional gaming operator in the U.S. They offer live sports betting in 9 states and are continuing to expand their business into an omni-channel powerhouse that includes retail and various online gaming and sports betting applications. 

Although Penn has had lots of success managing and operating within the retail casino industry, their investment opportunity comes from a breakthrough into media, entertainment, and online gaming. Penn’s equity stake in Barstool Sports, as well as its recent acquisition of Score Media and Gaming, will allow them to break into a rapidly growing, broadening market that is being driven by increased legalization and a highly engaged consumer audience. 

Business Growth: COVID-19 acted as a vicious headwind to the gaming industry, however, in their most recent earnings presentation, Penn proved that they were able to bounce back above 2019 numbers. After revenues fell nearly 77% YoY in Q2 2020 to $306M, the company reported a jump back to $1,546M in Q2 2021, up 13% from Q2 2019. This revenue increase was accompanied by a net income change of +237% from 2Q 2019 to 2Q 2021. Penn showed significant growth when compared to pre-COVID levels due to increasing EBITDAR margins from ~31% to ~38% and boosted customer visitation. The company also increased FCF 102% versus 2Q 2019. 

Penn is continuing to invest in their core gaming business with developments in their tech department. The company has rolled out their “3Cs” application that will be transformative post-covid. This application will allow customers to have access to digital wallets for slots and tables, transfer funds between wallets and slots, fund wallets with debit/credit, redeem chips at table games, and mobile card-in to slot machines. The 3Cs technology will help increase visitation numbers by easing human interaction and will help Penn’s core retail business as it expands with its iGaming and online betting applications. 

Online gambling legalization has also trended in the right direction for Penn, as more states are beginning to relax online betting rules and casino licenses. 

Barstool Sports Partnership: In January of 2020, Penn National acquired 36% of Barstool Sports, a media growth engine with over 66 million monthly active users and a massive, cult-like following of over 130M.  Barstool hosts some of the most popular podcasts in the world and also generates multiple revenue streams through its merchandise, advertising, and licensing. The company saw record sales in 2020 despite the pandemic and lack of sporting events, thus proving that they have a loyal following that will help generate success for Penn outside of sports. Penn has the option to raise stake to 50% in 2023 and we expect them to do this (if not acquire the whole thing). 

The gaming industry is witnessing a shift to online operations as a result of the pandemic and increased legalization, making Penn’s heavy focus on retail a little outdated. However, the strategic acquisition of Barstool will help open Penn to an entirely new vertical and make their omnichannel business model more successful. Penn acquired Barstool with the goal of leveraging Barstool’s brand and audience to help grow its online betting and iGaming application; and that is exactly what has occurred. Nearly 2/3 of Barstool’s audience are between the ages of 21 and 44 and around 60% of the 66M MAUs gamble on sports weekly, meaning 40M sports bettors per week. To put this number in perspective, in 2020 the American Gaming Association released the NFL would only reach 33.2M total sports bettors for the entire season. Barstool’s massive following of active gamblers will prove beneficial come football season in a couple weeks, otherwise known as “gambling season.” 

With the help of the partnership between Penn and Barstool, the Barstool Sportsbook first launched in Pennsylvania in September of 2020. Since then, the online sportsbook has grown rapidly and is expected to be operating in at least 10 states by the end of the year. The sportsbook already has around 14% market share in Michigan without much promotion on Penn’s side. Upcoming launches are highlighted by Colorado, New Jersey, Tennessee, Virginia, and Arizona; all of which are expected to launch by the start of the 2021 NFL season. Its upcoming shareable betslip feature falls right in line with what makes Penn special. The ability for users to be able to instantly share their betslips to social media is super valuable as it will increase media impressions and network effects making the flywheel model more efficient without expensive marketing costs. 

The value added by Barstool Sports is produced by their creative content, unique betting opportunities, and social media reach. These three aspects of Barstool allow the sportsbook and Penn brand to grow without significant marketing spend, giving way to lower customer acquisition costs while also funneling the Barstool audience into Penn’s core retail business. For example, Penn’s Greektown Casino in Detroit was rebranded to Barstool and share of gross gaming revenue rose 14%. Barstool alone is able to create enough buzz alone to push products, whereas a DraftKings or MGM does not have that leverage.

The sports betting business is only the tip of the iceberg when it comes to what Barstool brings to the table, however. 

Barstool’s brand will also continue to grow on its own through several new sponsorship agreements. Upcoming events sponsored by Barstool include golf match between PGA Pro Brooks Koepka and founder Dave Portnoy, boxing match between internet celebrity Jake Paul and UFC champion Tyron Woodley, and most importantly, broadcasting rights to the Arizona Bowl. By emerging into the live sports market, Barstool will generate top-line growth for Penn and even more name recognition.

There has also been recent news surrounding a potential partnership between Barstool and the MLB suggesting that Barstool could gain broadcasting rights for some midweek MLB games. Barstool’s reach to younger audiences and its unique personalities could provide the kick that the MLB needs to reach a greater audience. The broadcast would most likely incorporate a gambling aspect that would put the Barstool Sportsbook and Casino at the forefront of MLB games. 

Penn’s partnership with Barstool has a lot of untapped potential that they are soon beginning to realize as the world comes out of the pandemic. Penetration in a broadcasting market that lacks diversification, where they can directly (and on live TV) integrate in-game betting is a meaningful opportunity that is not reflected at all in Penn’s current numbers. 

Score Media and Gaming Acquisition: In an effort to expand further into the digital sports media, gaming, and technology market, Penn National Gaming recently announced the acquisition of Score Media and Gaming. The deal is scheduled to close in the first quarter of 2022. 

theScore is the number one sports app in Canada, which at 3.7M MAUs boasts over 9x more than ESPN in Canada. It is also third most popular sports app in North America, which will give Penn strong market share in a $30B sports betting and iCasino market. 

theScore operates through its media app as well as theScore Bet, its mobile sports betting platform. The media app includes real-time news and scores, betting lines, and social features. Much like the Barstool Sportsbook, theScore Bet offers customized bets and promotions as well as in-game bets and live bet trackers. theScore places a big emphasis on personalization in their apps which plays a big part in their popularity. 

The media app has shown great promise in F2021, as it has set revenue record for three straight quarters and has also seen user growth vs. 2019. Media revenue YTD is $27.5M which is an all-time high through Q3, a quarter which produced record high $8.9M in revenue. The media app also set a Q3 record with 470M total user sessions, increasing 19% from Q3 2019. theScore’s media app alone has great growth and reach in North America and especially in Canada, where single event sports betting was recently legalized. 

The developments in gambling legalization bodes well for theScore’s media and betting apps as Ontario is expected to approve commercial sports betting and iGaming by the end of 2021. Also, according to theScore, it will be “the largest regulated sports betting market in North America by population”. theScore’s existing presence in Canada as the number one sports app positions them well for the online gaming market expansion. Also, theScore Bet’s recent Q3 production of $73M will only be built upon as they integrate a proprietary Player Account Management System.

The new Player Account Management (PAM) system is one of the primary reasons for Penn’s acquisition of theScore. Currently, Penn does not fully own their technology stack and is spending on third party technology and service providers. The acquisition of theScore will allow Penn to bring everything in-house, reducing costs and strengthening customer experience. The PAM system that was developed by theScore will enhance user personalization, ease cross-platform integration, and bring risk and trading services all in-house. Penn stated that they expect to realize margin improvement of over 500bps due to technology savings. 

Not only will theScore and Penn save by avoiding third party platforms, but the PAM system will also create a better product. Benjie Levy, President and COO of theScore, had this to say about why the PAM system is more than just a financial tool. 

“A robust, flexible tech stack that can take inputs from the media side and the betting side, which in turn we can use to create a unique consumer-facing experience that wouldn’t be possible with an off-the-shelf tech solution or, quite frankly, an in-house tech solution that we acquired but wasn’t built for a specific purpose.”

By acquiring a company with a two-sided integrated system, Penn will see enhanced customer retention and low acquisition costs. In Penn’s press release, they show the benefits of theScore having both a betting and media app:

“Early results show the power of theScore’s integrated media and betting ecosystem to better engage and retain users; theScore Bet users with theScore media app compared to theScore Bet users who do not have theScore media app produce 88% higher handle/user, place 3x the number of bets/user, and generate a 91% increase in day 30 retention. This increased cross-promotion ecosystem between theScore and Barstool is expected to lead to higher revenue.”

Owning both Barstool and theScore will help Penn’s top line growth and the opportunity for the two companies to cross-promote through their massive reach is unique and not seen anywhere else within the gaming industry. Penn expects that theScore will produce EBITDA accretion by year 2 and upwards of $200mm medium term and $500mm long term EBITDA upside. 

Valuation:

When we look at Penn’s valuation, it is difficult to find accurate comps due to the uniqueness of Penn. No other company has a fully integrated gaming system that also flourishes as a social media giant, positioning Penn well for the shift in the gaming industry. Traditional casinos typically trade at P/S multiples of 2-4x (with PENN trading at 2.6x) while fully online gaming companies such as DraftKings (DKNG) trade at significantly higher multiples (15-20x+). The online gaming and Barstool segments of Penn are expected to grow from ~6% of revs to 15% over the next two years, and even more after that, which should provide meaningful expansion of the P/S multiple as the company places more focus on its non-retail gaming. 

The company is currently trading as if the core gaming business is fully stalled out, however as shown by the slide below, the casino business is actually becoming more profitable. We believe even this business will continue to grow, though it will be at a slower pace than the online segments. The core retail business should also see expanding margins from technology upgrades across the casinos (3Cs) and a growth in customer visitation due to contactless gambling. 

In addition, you have one of the best capital allocators for a management team in the industry, which means they are likely to make smart decisions for shareholders going forward and therefore this stock should trade at higher multiples than traditional casinos on that alone. 

Penn management is headed by President and CEO Jay Snowden, a seasoned executive who has helped Penn see a rise in stock price from ~$39 to $80. Snowden became CEO in January 2020 and almost immediately made the decision to take a stake in Barstool Sports. He helped the casino operator prosper through the pandemic despite core operations being completely shut down, proving that he is capable of making smart decisions for the company during tough times. Snowden has experience in the gaming industry, previously serving as SVP and GM of Caesars and Harrah’s in Atlantic City as well as other positions throughout the U.S. 

From a timing perspective, we expect the sentiment around Penn to shift more positively as football season ramps up and online sports betting gets back into mainstream. The arrival of the Barstool Sportsbook will help Penn see significant revenue growth as football has the most popular betting season versus any other sport. Historically, football season has been a good time of year to own this stock and we see the trend continuing through this year. 

The opportunity with Penn is less about the casino chain itself, but instead is more about the company’s potential to leverage Barstool’s loyal fanbase as well as theScore’s technology and Canadian presence. Barstool’s millions of followers are prominent members of the gambling community and allow Penn and Barstool to garner successful products without massive marketing campaigns. All it takes for Penn to launch a campaign is simply to tell Dave Portnoy, who has 2.6M Twitter followers and 3.7M Instagram followers, to talk about something for free. The partnership with Barstool helps Penn standout among other competitors like DraftKings because of this capital light flywheel model. More Barstool users leads to more retail users and vice versa. We believe that Penn is still in the early stages of fully utilizing the Barstool partnership and will push into the live broadcasting market in the near future.

The combination of the Barstool powerhouse with in-house technology and a Canadian presence from theScore leaves a massive market opportunity for Penn. Canadian legalization of online sports betting means an already popular Score Gaming is poised for success. These strategic acquisitions by Penn give them various revenue streams and advertising efficiency.

Summary

PENN management is building a fully integrated, omni-channel (both online and in-person) gambling company that has best of breed / lowest CAC that funnels through Barstool to in-person and online betting events. Live integration with media rights further perpetuates the Barstool Sportsbook flywheel, which should lead to revenue growth, expanding margins and better revenue composition. All of which, should increase the multiple at which Barstool trades over coming years. 

Catalyst

Barstool Partnership

theScore Acquisition

Football Season 

COVID Reopening