Penn National Gaming Enters The Mainstream

Penn National Gaming (NASDAQ: PENN) was one of the hottest stocks to own as markets recovered from last year’s COVID induced selloff and for many is still just as attractive now. Casinos and racetracks were among those industries on the frontline against the pandemic so unsurprisingly Penn shares were incredibly vulnerable at the time, and they shed upwards of 90% before the selling stopped around this day last year. But any concerns that the sudden reversal off the lows was just a dead cat bounce were quickly put to bed, as the stock hit its pre-pandemic levels by June and didn’t stop.

For those that held through the crash or bought in the aftermath, it’s been a profitable twelve months. As of Friday’s close, shares of the Pennsylvania headquartered company were up more than 3,000% from the lows of last March. Despite a four-digit percentage run however, there are still plenty of reasons to think that Penn is only really coming of age now and that its best days are ahead of it.

Earlier this quarter, Credit Suisse upgraded shares to Outperform and in a note to clients said their “Outperform rating is based on four key factors: (1) upside from pandemic-related savings and recent acquisitions as the topline returns, (2) upside to targeted cost savings, (3) better-than-expected margins in sports betting, and (4) PENN’s potential leadership in iGaming." Their price target of $128 has been hit and surpassed since, but with shares down 20% from last week’s all-time highs it’s still suggesting upside of at least 10% from current levels.

Coming of Age

Penn, and other gambling peers like DraftKings (NASDAQ: DKNG), seem to be finding themselves in the right place at the right time, with a wave of sports betting legislation sweeping the nation. Sportsbooks have been setting records in recent months with Illinois registering upwards of $600 million bets in January alone, a record high for the state.

Only last week, online media giant Barstool announced a partnership with Penn that will allow them to launch their own Sportsbook app. This will open up a ton of fresh market share for the latter to take advantage of and investors haven’t been slow about buying into the growth potential. It feels as if we’re at an inflection point for the online gambling and sports betting industry, fuelled by a wave of legalization similar to that which has brought marijuana stocks and ETFs into the mainstream over the past ten years.

Huge Opportunity

Companies like Penn which are well established and well regarded, stand to do very well when it comes to taking advantage of what’s effectively a greenfield opportunity. Their recent growth and future potential hasn’t gone amiss with the powers that be either. Last week’s news that, along with Caesar’s (NASDAQ: CZR), Penn will be added to the S&P 500 index brings an air of respectability while also opening the company up to being bought by funds that are mandated to only owning stocks in the benchmark index.

At the same time, it’s worth keeping February’s Q4 earnings report in mind if you're thinking about getting involved. EPS managed a black print but were well below where analysts were expecting while revenue was still down 23% on the year. The price action since suggests Wall Street has been happy to mark this off as a hangover from COVID and the ongoing economic reopening should soon make those kinds of prints a distant memory. But Penn will need to start showing revenue growth of double digits in the other direction soon to justify the 3,000% move.

That being said, the internal momentum and industry tailwinds are there for it to do it, and it’s hard to not to want to back them right now.