Analysis: Is Barstool Sportsbook Acquisition Working For Penn?

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Barstool is back in the news this week, again casting a bit of a shadow over a Penn Entertainment earnings call.

Penn reported revenues of $1.67 billion for Q1, up 7.0% from 2022 to beat estimates by $80 million. Adjusted EBITDAR fell 3.3% to $478 million, though, and earnings per share missed the mark to draw a negative reaction from investors.

LSR covered Penn’s Q1 2023 presentation in more detail. The report shows that Penn is treading water as a gaming entertainment company operating in a mixed economic climate, but questions remain about the long-term viability of its Barstool-branded sports betting segment.

Penn declined to comment on Barstool’s performance for this story.

Penn’s sky-high expectations for Barstool Sportsbook

Penn initially acquired a partial interest in Barstool Sports in 2020 with great fanfare, backstopped by bold predictions of success.

Analysts were bullish on the potential for this “hypergrowth sports media business” to convert its existing content consumers into bettors, a tack largely untested in the young US sports betting market.

Penn hoped to compete with the likes of FanDuel and DraftKings without needing to spend at their levels for acquisition, with a reported 100 million customers already in the incubator. It made a big investment in tech to support its new brand.

Stock prices jumped, interest began to build, and the gameplan started to take shape.

Leveraging the Portnoy effect

As promised, the Penn team went hard at organic marketing via Dave Portnoy and his crew. Social media was frantic with reactions to Barstool’s transition into a full-fledged gambling brand, and consumption of its multimedia content soared.

The Barstool Sports team ramped up its slate of gambling broadcasts and even promoted their own bets via Barstool Sportsbook. They flew around the country attending launches.

Investors imagined they were witnessing the birth of the dominant sports betting media company, a perfect marriage of Barstool’s influence and Penn’s assets. In late 2020, Rosenblatt Securities issued a bull-case target of $300 for Penn stock and a 33% market share in sports betting.

Neutral forecasts meanwhile expected Barstool to capture perhaps 15% of the US sports betting market.

Barstool sample from recent months

In raw numerical terms, that vision is not yet playing out.

The Barstool Sportbook app is available in 16 states, making it the nation’s fifth-most prevalent digital sports betting brand. The sheer breadth of its empire is a testament to Penn’s prowess in the larger universe of casino gambling.

Its success in sports betting, however, has been meager.

Online sports betting share struggles

Across the Barstool markets that report data at the operator level, its overall share of online volume over the last 15 months is 5.5%. That puts Barstool well behind the four leaders and competing with BetRivers for fifth place.

Barstool’s combined share of gross revenue is even lower at 4.5%, though some of that difference could stem from smaller promotional spend.

That is better than most, to be fair, including established gaming companies like PointsBet and Wynn. It is worlds better than Fox Bet, the other direct attempt to merge established sports media and gambling in the US.

But it is a far cry from 15%, let alone 33%. And returns from the first few months of 2023 are not very promising, including uninspiring launches in Ohio and its home state of Massachusetts.

Where Barstool presence is showing up

Michigan is Barstool’s best-performing market, where its retail and online operations combined to account for 10% of volume and 7.4% of revenue in the state in 2022. Barstool also does reasonably well in Illinois and Pennsylvania.

It has so far failed to make an impression in newer markets, however, and it remains shut out of New York sports betting entirely after its proposal was rejected by regulators.

Barstool’s total share of the broader US sports betting industry is today closer to 3%.

Barstool Sportsbook app not quite there

User reviews for the app the roughly match the national market share picture.

Barstool Sportsbook’s s rating on the App Store is a respectable 4.7, a tick below the 4.8 shared by FanDuel, DraftKings, and BetMGM. Bettors seem to think the app is fine.

Independent testing data from Eilers & Krejcik ranks Barstool 7th out of 38 sports betting apps, with high marks in metrics related to look and feel. It remains comparatively limited in functionality and sits in the middle of the pack for overall user experience.

Conversion numbers from Penn suggest that the adoption of Barstool Sportsbook beyond its core audience remains limited. And trends in the data over time suggest that retention isn’t particularly strong either.

Barstool physical footprint a highlight

While the app has failed to gain traction with the betting public, Penn’s portfolio of regional casinos has enabled Barstool to build an enormous physical footprint. There are currently 17 brick-and-mortar sportsbooks that bear the Barstool banner across nine states, and Penn continues to work to rebrand its remaining Ameristar and Hollywood books.

Some of them really stand out.

Michigan’s Greektown hosts one of the busiest sportsbooks in the country outside of Nevada. Barstool wrote more than $130 million in tickets there in 2022, more than all four in-person sportsbooks in New York combined.

Can in-person make it worth the squeeze for Penn?

The numbers make sense given the property’s prime location in the heart of Detroit. But the Barstool-branded sportsbook at Hollywood Lawrenceburg does nearly as much business as Greektown, and its ability to draw bettors to suburban Indiana is hard to ignore.

Barstool’s new locations at Kansas Speedway and Plainridge Park in Massachusetts are similarly popular in their early days too.

Apart from the stalwarts of the Las Vegas Strip, only FanDuel sees more foot traffic to its retail sportsbooks across the country than Barstool does. Operational performance aside, the Barstool brand is a clear asset to Penn’s properties.

Notes from Penn Q1 report

According to last week’s presentation, Barstool expects to generate approximately $250 million in revenue during 2023.

Most of that will go straight to the parent company after Penn fully acquired the remainder of the brand earlier this year. That revenue, it says, will be enough for the sports betting segment to have a breakeven year.

Barstool and the rest of Penn’s interactive division posted an EBITDAR loss of $5.7 million for the first quarter.

Yesterday’s price is not today’s price

Penn paid more than $500 million over two installments for the Barstool assets, a package that investors today value closer to $1 billion. That is not a bad hypothetical return on its investment. It is not clear there would ever be a buyer at that price, however, and Penn is likely not eager to divest itself from the only thing keeping its sports betting segment relevant: the Barstool brand.

“Our product really is substandard today, and we know that,” CEO Jay Snowden told investors on Thursday’s call.

Penn is still working to integrate the $2 billion tech stack that it acquired from Score Media in 2021 before shuttering theScore Bet brand in the US. Snowden previously told the Wall Street Journal that he believes Barstool’s “media appeal” is the key to Penn’s future in sports betting.

Product remains a shortcoming for now.

Investors sell Penn narrative

The market did not respond favorably to the Q1 report, with shares of $PENN slumping 14% to close near a 52-week low.

Investors seem to have some doubts about the transition from top-line growth to actual profit.

Barstool Sportsbook represents just a small portion of Penn’s $7 billion business, and it seems fair to ask if the juice is worth the squeeze.

Controversy follows Barstool

There are also lingering questions, at least in the eyes of some regulators, about Barstool’s underlying suitability to offer sports betting under Penn’s licenses.

Portnoy has been the subject of several major news stories in recent years that cast him as racist and misogynist. These concerns can become a regulatory matter in states where Barstool operates as a licensed gambling company.

They have become a regulatory matter, in fact, with Massachusetts actively investigating Portnoy’s conduct as a condition of Penn’s permanent licensure there. Regulators in Nevada and Indiana had previously scrutinized the relationship between Penn and Barstool.

It’s not just Portnoy either.

Continued Barstool Sports issues

Last week, Penn fired Barstool influencer Ben Mintz for using a racial slur during a live video broadcast. Onlookers have also expressed discomfort with members of the Barstool team betting on the Barstool app.

Regulators have expressed discomfort about some of the marketing tactics they employ, notably the Can’t Lose Parlay that Barstool eventually discontinued amid pushback in multiple states.

Barstool’s decision to use the its live college football show to market its gambling app near the University of Toledo campus also drew ire and fines from officials in Ohio.

Portnoy also denies all allegations of personal misconduct made in stories published by Business Insider. BI subsequently published a strong editor’s note defending its reporting.

Penn seems to accept Barstool drama

Penn seemingly embraces the controversy in defense of its influencers. Snowden has been unwavering in support of Portnoy, an unsurprising stance from the CEO of the company that paid to acquire his personality.

The issues surrounding Barstool’s suitability came up during Penn’s earnings call Thursday, with executives working to frame the latest news as a misguided form of comedy.

“There’s gonna be some drama sometimes,” Snowden said in response to a question about Mintz. “There’s gonna be some things that pop up here and there, and we’ll manage through those.”

‘Unapologetic’ company pushes and pushes

Barstool Sports CEO Erika Ayers (Nardini) echoed those sentiments with a follow-up response highlighting the authentic, “unapologetic” nature of the brand as it relates to its overall popularity:

“Most people who play in the digital media space or the cable media space or the print media space don’t exist or are faltering. And when you look at the success of our business, a lot of that is due to […] how we run our creative team and the freedom we give them, the tools we give them, the entrepreneurial spirit that exists inside of Barstool.”

Future prospects for Barstool Sportsbook?

There is no doubt Barstool is a popular sports media brand. But it is not a popular sports betting brand. For all of the chatter it created around the industry, the product has not found a significant foothold in any market to date.

Even if you consider the price tag a bargain, the timeline for Penn to recoup that $500+ million investment is indefinite at the current breakeven pace.

Notably, Barstool is working hard to become a household name in the online casino space too. Penn already offers slots and table games under the Barstool brand in four states, and it spends considerable time highlighting the success of theScore Bet’s casino product in Ontario. It claims to be among the market leaders there, though Ontario regulators do not release revenue information by operator.

Another book looking for iGaming salvation

The presumptive expansion of iGaming in the US continues to be a focus of Penn’s corporate outlook, and the online casino market is potentially much larger than the sports betting market. If legislation breaks favorably in the coming years, casino could be the segment that ultimately drives Penn Interactive to profitability.

For now, Penn still maintains confidence in its long-term plan for the Barstool brand as a sportsbook. It expects to make a bigger push at paid marketing once the leaders begin to reign in their spend, a departure from its blueprint that it hopes will generate a corresponding increase in customers.

Snowden indicated that Penn plans to fully integrate its new tech from Score in time for the upcoming football season. That could improve margins, and it also could make the product more competitive in the marketplace.

“I would expect as things settle out, you’ll see [Barstool’s] percentage of market share continue to grow,” he said on the earnings call. He declined to provide specific guidance for the brand beyond the breakeven forecast for 2023.