The launch of ESPN Bet went much better than expected for Penn Entertainment, but that was not a positive for company stock.
Despite growth in Penn’s core retail casino business, analysts have concerns over the cost of the noisier interactive sports betting business for this year after its 1.5-month launch period led to an adjusted EBITDA loss of $333.8 million. Penn originally guided for a loss between $100 million and $150 million for the quarter.
Aided by market concerns over a Fed rate hike, PENN closed down 7.18% on Tuesday to $17.27, a new 52-week closing low.
The stock is down 23.2% since Wednesday‘s close, the night before Penn’s fourth quarter earnings call where it announced it now expects a roughly $400 million interactive loss for this year.
Penn stock PT changes
Those higher than expected losses for the fourth quarter and projected higher costs this year led to estimate revisions that dropped the stock’s target from multiple analysts.
Three dropped their targets down to $23 while maintaining their hold ratings. Both Barry Jonas of Truist and Steven Wieczynski of Stifel previously had a $27 target, while Carlo Santarelli of Deutsche Bank came down from $28.
Chad Beynon of Macquarie dropped from $35 to $33 and noted he includes a value for ESPN Bet of $14 per share. Beynon maintained his outperform rating “given potential value if PENN can execute, but acknowledge the margin for error is razor-thin.”
Will Penn spend like ‘drunken sailor?’
Wieczynski published a lengthy note following the call and expressed concern over unrealistic expectations around the interactive business.
Penn pivoted from Barstool for ESPN Bet right as the product was turning profitable, he said. While ESPN Bet could have a better long-term opportunity, it could mean years of overanalyzing market share and the cost of any gains.
Wieczynski said he questions whether Penn will easily break even in 2025 or if it will be a stretch to get there while the company chases market share goals: “With ESPN Bet having current market share in the ~7% range, moving that market share higher is going to be tough to do unless Penn spends like a drunken sailor.”
Penn essentially has two choices, both of which come with a downside. Taking a higher market share will mean bigger losses, but lower market share could disappoint both investors and Disney, which can opt out of the 10-year agreement after three years.
‘Long and bumpy’ interactive road
Santarelli noted there is one difference between Penn and others in the US sports betting market: significant losses.
“They have spent, and lost, considerably more, in their formative/ramp years, than those who currently sit in the 3-6 market share positions, and multiples more than the also-rans,” Santarelli said.
Despite the strong brand partnership and the $700 million to $750 million in losses expected before break-even, Penn’s hopes of grabbing more than 10% market share “are not supported by historical experience,” he said.
ESPN Bet’s “long and bumpy” road will likely mean Penn’s stock will be traded more on sentiment and data points than actual progress and core business growth, Santarelli added.
