Is It Time to Take Some Profits on Penn National Gaming (NASDAQ:PENN)?

Penn National Gaming (NASDAQ:PENN) was one of the biggest winners as the country began to reopen this summer. And in the case of Penn and other sports betting sites, reopening meant the return of live sports.

That makes sense. Online gaming can only get you so far. The company’s relationship with Barstool Sports relies on having action available for bettors.

Penn National Gaming owns and manages gaming facilities, racing facilities, and video gaming terminals. It has an asset-light approach which was a drag on the stock at the onset of the pandemic (casinos weren’t open and not paying their rent), but seems to be less so now. 

And Penn also formed a partnership with Barstool Sports in 2020. When the online sports app launched in Pennsylvania, $11 million was wagered in the first week alone.

A Quick Recovery But Now What?

It didn’t take long for PENN stock to recover from the pandemic selloff. Many investors were betting (no pun intended) that the market for gambling had not dried up, and would return when casinos were allowed to reopen. Plus, with more time on their hands, many consumers were turning to online casino games.

However in the last six months, PENN stock is up more than 200%. That dwarfs the gain in that same time period by DraftKings (NASDAQ:DKNG) of 80% and MGM (NYSE:MGM) of 89%. One reason that is tipping things in PENN’s favor is its partnership with Barstool that, according to Goldman Sachs could add $4 per share to the company’s value.

Expect Diminishing Returns From the Reopening

A successful, if not disrupted collegiate and professional football season hasn’t hurt. But the real catalyst for these stocks was in the state houses. Five new U.S. jurisdictions launched licensed sports betting operators. And three states (Louisiana, Maryland and South Dakota) passed ballot initiatives and are pending legalization.

Many states are eyeing the legalization of sports betting for practical reasons. They have holes in their budgets from the pandemic, and sports betting are a way to make up those losses. Some analysts suggest online sports betting could generate up to $40 million in Michigan alone.

However, it’s becoming clear that for every state that legalizes sports betting, the return for investors in sports betting stocks is diminishing.

“This was never going to be the panacea that saved a business,” said Casey Clark, senior vice president, strategic communications for the American Gaming Association. “…There is a revenue opportunity to be had, and for some states where that’s earmarked for education or infrastructure, they saw huge deficits during the pandemic. I understand why some states want to move quickly, there are jobs to be had … and real opportunities for people.”

That doesn’t mean, however, that there’s no benefit at all. The question will be if the states that legalize sports betting allow the gaming market to run through companies like Penn National and DraftKings or if it will be forced through a state-run gaming commission.

That’s the case in New York, which could be looked at as the great white whale for sports betting companies. According to PlayNY.com which covers New York’s gaming market, the state could generate up to $20 million in bets and $100 million in tax revenue which would make it the largest state for online sportsbooks.

Is PENN Stock Overpriced?

As is usually the case with things like this, investors have driven up the price of the stock. And the question is does PENN stock have much of this growth priced in? According to Trefis, Penn is factoring in approximately 15% revenue growth for 2021.

However, DraftKings and MGM are forecasting similar growth. This is a very competitive market. It has yet to be seen if Barstool can provide the company with an effective and unique selling proposition. That will be something to look for when the company posts earnings.

Volume for the stock has remained fairly consistent since spiking in late October. At that time, it suggested that PENN stock had momentum. Right now, it appears volume is lightening up. A surprise to the upside could change that. But with a stock that’s already increased 30% since the first of the year, it may be a good time to take a little profit and wait for a better entry point.