Analyst: Market too bearish on ESPN Bet

April 23, 2024 3:22 PM
Photo: ESPN
  • David McKee, CDC Gaming Reports
April 23, 2024 3:22 PM
  • David McKee, CDC Gaming Reports
  • United States

Truist Securities analyst Barry Jonas took ESPN Bet’s parent company “Out of the Pennalty Box” this morning. The punning reference was to Penn Entertainment’s stock, which Jonas had downgraded to “Hold” when Penn launched ESPN Bet last August.

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Jonas placed a “Buy” rating on Penn shares with a price target of $23 apiece. The stock was trading at $16.93 per share at the time.

Noting that the stock had languished since his downgrade, Jonas wrote, “We think expectations are too low and the market is not only too bearish on ESPN Bet, but also assuming no value for PENN’s other profitable Interactive businesses.” Penn shares have declined 38 percent at a time when the S&P Index is up 12 percent.

The analyst observed that the stock market was valuing Penn’s brick-and-mortar operation at 6.4 times its estimated 2025 cash flow. He assumed $455 million in cumulative digital losses between now and the end of next year, “though it’s also possible the market is assuming more losses and valuing the core land-based business higher.

“But Interactive is more than ESPN Bet,” Jonas resumed. He opined that Wall Street is overlooking several non-ESPN pieces of the Penn digital portfolio. “In the event ESPN Bet fails … we think Interactive would still have value for PENN.”

For instance, Penn owns several igaming licenses that Jonas deemed to be of high value, in light of its vast, terrestrial, casino footprint. These provide between $50 million and $70 million a year in stable skin fees from FanDuel, DraftKings, and others.

“Additionally, PENN’s igaming business has strong omnichannel ties and doesn’t have the same cost structure as [online sports betting] – meaning it can be profitable even at [a] smaller scale,” Jonas penned. He noted the company’s social-gaming business as an additional item of value.

And there’s more to Penn and OSB than ESPN. In Canada, it has theScore, which the Truist analyst described as in double digits of market share in Ontario and growing. “While perhaps not worth the original $2B PENN paid for theScore, we think there’s clearly some value. …

“When we parse out each facet of PENN’s Interactive business, we see explicit value for Hollywood iGaming, theScore Ontario, and PENN’s skin fees to other operators that build to our $23” price target, Jonas wrote.

He painted a worst-case scenario in which ESPN Bet had to be scuttled, observing that even then, Penn would have other profitable digital businesses to draw upon. He argued that while some on Wall Street contend that ESPN Bet merits negative value, “we don’t think management or the board would let ESPN Bet continue indefinitely without profits or value in the market.”

Still, while Jonas thought ESPN Bet not risk-free, he offered that it was a “strong brand [that] could offer lots of rewards.” Although DraftKings and FanDuel were described as far in the lead, “we see plenty of white space for a third-place player to emerge. ESPN Bet has already achieved its standing with relatively nascent tech compared to PENN’s ultimate vision for the product.”

The key, Jonas wrote, was execution, particularly of Penn’s upcoming Bet Mode app. Should it prove to be seamless, he predicted that ESPN Bet’s market share could “catapult” above 10 percent.

And if the newcomer succeeds “to any degree,” Jonas sees meaningful upside. Penn management is of the view that ESPN Bet will propel $700 million in annual cash flow eventually. In that event, Penn stock would be worth $40 per share by 2027.

Penn “may not receive credit for all of that for some time, though it highlights how sensitive the model is.” Jonas wrote that each $167 million in additional equity value the company gains is worth an extra dollar of share value.

He furthermore believed that Penn stood to be a particular beneficiary of additional igaming legalization in North America (although some commentators don’t believe that will happen for two years). Shares would appreciate even further, he wrote, should Wall Street ascribe value to new Penn-branded casinos currently arising in Joliet and Aurora, Illinois.

Additional catalysts for value were identified as including the naming of Aaron LaBerge to be Penn’s new chief technology officer, beginning July 1. “We believe Mr. LaBerge was already deeply involved with ESPN Bet and should be able to hit the ground running upon transitioning to the other side of the table,” Jonas wrote, adding that the appointment would give ESPN Bet credibility with investors.