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Penn National Gaming's Path Forward

By Bradley Freeman – Jul 2, 2020 at 9:10AM

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The company plans to thrive in a major new market.

Earlier this year, Penn National Gaming (PENN 5.39%) completed the first of two planned equity purchases of Barstool Sports. The deal gave Penn 36% of Barstool with warrants to acquire up to 50% of the company at a $450 million valuation.

For a company with a market cap of roughly $4 billion, this was a significant move by Penn and one that investors initially used as a reason to propel the stock price to a new high of almost $40 per share. Shares have since cooled back off to roughly $32 per share amid casino shutdowns and the halting of professional sports. For investors with a long-term mindset and stomach for volatility, Penn National Gaming is a great play.

Two hands exchanging money in front of soccer ball

Image source: Getty Images.

Barstool's ideal following

With 66 million monthly active users, Barstool has broad reach. Importantly, its audience is generally younger than the clientele Penn serves, which perhaps contributed to Barstool's web traffic increasing by 50% amid the pandemic shutdowns. Two-thirds of all Barstool fans are below the age of 30, and 25% of Gen Z Americans consume Barstool Sports content monthly with the majority doing so frequently.

This young and sizable fan base is ripe for Penn National to monetize. Research shows that Barstool customers are more likely than the average consumer to participate in all of the things Penn specializes in: entertainment, dining, and betting. Now, customers will be able to do all their favorite things at Barstool Sports-branded properties. Penn National is looking to build a new sports gambling conglomerate that places an emphasis on fun, using its casinos as national destinations for gambling and good times. With the Barstool brand available for Penn National to leverage, the sky is the limit.

As of late June, 70% of Penn's properties have reopened. The locations that are back in business post-pandemic are sizably outperforming expectations even before being rebranded as Barstool.

Barstool mobile betting app

The Barstool Sports betting app Penn plans to release this year is also poised for success. Just as the Barstool users spend a higher amount on the services Penn provides, they are also more tech-savvy. The tens of millions of passionate Barstool followers love sports -- and love to bet. They'll be able to consume commentary, interact with their favorite Barstool personalities, and place wagers all on the same phone application.

Sports gambling as an industry is enjoying impressive growth. Total revenue is expected to reach $155 billion by 2024 with an annual growth rate of 8%.

In fact, sporting events that did happen during the coronavirus shutdowns experienced two to three times normal betting volumes. American sports leagues like the NBA and MLB have announced plans to play in July with the NFL still intending to kick-off its season in the fall. A Barstool Sports book release is coinciding with a long-term sports hiatus ending -- quite the conditions for Penn and Barstool to thrive.

To give an idea of the kind of investor excitement behind sports gambling: Public pure-play DraftKings -- with a fraction of the revenue and cash on hand that Penn enjoys -- has a $12 billion market cap, three times that of Penn.

Few companies will be able to combine the regional casino footprint, digital gambling application, and brand awareness quite like Penn. Live sports are coming back, and with sports gambling set to continue its super-charged growth, no single company is better positioned to capitalize on the opportunity than Penn National Gaming.

Bradley Freeman owns shares of Penn National Gaming. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Penn National Gaming, Inc. Stock Quote
Penn National Gaming, Inc.
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$27.96 (5.39%) $1.43
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