Stock of the parent company behind the ESPN Bet sportsbook had an interesting reaction after being downgraded: it jumped.
On May 13, Shaun Kelley of Bank of America downgraded Penn Entertainment to neutral from buy with its target falling to $17.50 from $28. What was once a growth story, Kelley now sees Penn as “more of a deep value turnaround.”
Kelley called out disappointing first-quarter results, a lower-than-expected sports betting market share for ESPN Bet and lackluster core business trends as his reasons for the downgrade and adjustment to earnings expectations.
Despite the report, PENN jumped 6.6% the day of the report to close at $16.90 on volume that was up 18% from its average. The stock hit a low of $15 in early May, a price not seen since the COVID-19 lockdown, which led some insiders to increase their PENN holdings.
Kelley questions ESPN Bet cost structure
ESPN Bet has two challenges right now, according to Kelley: its low revenue and its high fixed costs.
Penn is shelling out more than $2 billion in cash and stock over 10 years in its partnership with Disney, though the $150 million annual payment to Disney is not for expenses. Penn reported a loss of $333.8 million in adjusted EBITDA for the fourth quarter, more than double or triple the $100 million to $150 million in losses Penn guided for the quarter.
Meanwhile, Kelley pegs ESPN Bet around 4% of US online sports betting market share. He estimates ESPN Bet accounts for just $2 a share compared to his estimate of $18 a share shortly after launch.
“Without a big acceleration (and soon), it looks hard to scale to profitability, leading to ‘higher for longer’ losses that we think place significant risk on Q4 and 2025 estimates,” Kelley said.
Will ESPN Bet always play catch-up?
Kelley noted product improvement is not expected until it is time for NFL sportsbooks to kick off in late August or early September.
At that point, Penn faces rising competition, a launch into the expensive New York sports betting market and may have to re-engage customers it spent so much time acquiring after launch, he said.
Right now, according to sports betting app testers with Eilers & Krejcik, ESPN Bet sits outside the top 10 sports betting apps, being ranked No. 11. That puts the brand behind two sportsbooks (BetRivers at No. 8 and betJACK at No. 10) that run on technology from Kambi.
Kambi was Penn’s sports betting tech provider until last summer when Penn moved its sportsbook onto in-house technology.
ESPN Bet, regional casino costs add pressure
Kelley also called out the increase in leverage, or its net debt-to-EBITDA ratio, with these costs and the $800 million being spent on Penn’s regional casino business pushing leverage to 6.3 times in 2025, up from 4.1 times back in 2021.
The regional casino segment carried Penn’s interactive investments over the years, and even “modest deterioration” would be a risk, Kelley said. The segment reported $476.4 million in adjusted EBITDAR in the fourth quarter, which helped the company as a whole hit positive adjusted EBITDAR despite interactive’s hit.
The additional costs mean free cash flow yield is somewhere around 5% to 18% throughout 2025 and 2026, compared to its implied free cash flow yield of 20% to 25%, Kelly said.
That is “in-line with peers, despite the highest risk in our coverage,” Kelly added.
Insiders show confidence in PENN
At least two Penn insiders consider now the right time to buy into the company. CFO Felicia Hendrix spent around $250,000 to buy 16,157 shares May 6, taking her ownership to 68,596 shares.
Chairman David Handler, meanwhile, added 60,000 shares directly in May. The first transaction on May 6 was for 20,000 shares at $15.40 each, and he bought another 40,000 on May 29 at an average price of $14.94.
A foundation Handler is indirectly associated with also added 20,000 shares on May 7.
