With 22 states and Washington, D.C., now having legalized sports gambling, the estimated $150 billion industry is ripe for the taking. Several companies are aggressively trying to carve out market share in the newly regulated activity that is expected to grow by 11.5% annually through 2025.
While high fliers like Landcadia Holdings (NASDAQ:LCA) and DraftKings (NASDAQ:DKNG) are flashy names among investors, Penn National Gaming (NASDAQ:PENN) is the best way to invest in the space. Here's why.
Quickly recovering casinos
Establishing a sports gambling presence will not be cheap. This is why Penn's casino portfolio is so ideal. As of today, 39 of Penn's 41 properties are open. Furthermore, revenue at Penn's properties is an impressive 94% of pre-COVID-19 levels, and in the second-quarter earnings call, management said the company returned to positive free cash flow in early June. Penn's portfolio tilts strongly to regional properties that consumers generally drive to rather than flying to. With COVID-19 severely affecting air travel, this exposure is greatly preferred.
Neither DraftKings nor Landcadia's Golden Nugget brand will be able to lean on this normally dependable source of free cash flow like Penn can to invest in sports gambling. Penn has far more in-person gambling locations than both rivals plus a plethora of digital betting offerings to deepen its connection to the consumer. This is a truly omnichannel approach to sports gambling.
Barstool Sports partnership
While DraftKings and Landcadia have far fewer physical casino assets than Penn to generate free cash flow, both still have powerful brands. But now Penn does too through its partnership with Barstool Sports to create a sports betting powerhouse. Earlier this year, Penn purchased 36% of Barstool at a valuation of $450 million. Together, the combination will release Barstool Sportsbook in September in Pennsylvania before rolling it out across more states over the following quarters. What does Barstool bring to the table?
The sports media platform attracts 66 million monthly active users. Neither Landcadia's Golden Nugget brand nor DraftKings enjoy anywhere close to that kind of scale. DraftKings currently attracts 720,000 monthly gamblers. Some 62% of Barstool's giant following identify themselves as sports gamblers, and a full 50% of them gamble on sports weekly. That equates to 33 million Barstool fans who habitually gamble on sports (10% of the U.S. population).
Barstool has additional product differentiators, like two of the top 50 podcasts in the country, and dozens of popular personalities to integrate directly into the new Sportsbook product as well.
In terms of who these Barstool users are, "Stoolies" are more likely to engage in brand-centric shopping, entertainment consumption, and technology adoption. These are all compelling characteristics for Penn's traditional business model, featuring live gambling and entertainment plus its new digital gambling offerings. Penn CEO Jay Snowden is actively shifting his company's casino portfolio to Barstool's brand to fully enjoy the power of the cult following.
Penn National Gaming's following was admittedly much older than the typical sports gambling fan. Barstool is the perfect fix for that, with 27% of Gen Z Americans engaging with Barstool monthly. A full two-thirds of Barstool fans (44 million people) are below the age of 30. Barstool is winning over customers at a very young age, a great sign of long-term revenue potential.
Penn's demographic was also more female than that of the average sports gambling site; Barstool changed that as well. About 69% of its daily users and 61% of its monthly users are male. This tilts far more male than Penn's user base did pre-acquisition. Everything that Penn was lacking compared to DraftKings or Landcadia, Barstool more than makes up for.
Penn National Gaming offers the rare and compelling combination of a casino portfolio rebounding quickly, and a sports gambling partner offering a ubiquitous brand to leverage. As gambling continues to evolve, Penn is poised to grow wherever its users may be, and it is primed to deliver promising stock returns for investors.