This month, Cathie Wood's Ark Invest made news by opening a position in the online gambling platform DraftKings (PENN 2.25%). Nationally, online gambling is growing at a rate of 13.2% annually, and with more states (including New York) taking a look at legalization, there's good reason to expect the segment's growth to continue.

Despite Ark Invest's optimism, I do not believe DraftKings is the best way to invest in this promising space. Penn National Gaming (PENN 2.25%) is a better play.

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Image source: Getty Images.

A perfect gambling partner

In 2020, regional casino company Penn National Gaming purchased a 36% stake in Barstool Sports for $450 million. Under the terms of the deal, it has options to raise its stake to 50% in the coming years, and according to CEO Jay Snowden, it will exercise them.

So what does Barstool Sports bring to the table as a partner?

With 66 million monthly active users as of 12 months ago, the sports media brand truly attracts an army of people. What's more promising is that 62% of these users also gamble on sports, and 44% do so weekly. For context, Barstool attracts more gamblers to its content monthly than the NFL estimated it would attract over the entire 2020 season.DraftKings simply does not have a built-in fan base of this size to leverage.

The type of fan Barstool attracts is also younger, and more likely to be male, than Penn National's traditional demographic. Given that sports gambling caters predominately to young men, that's not surprising, but for the casino operator, it was also a much-needed change.

Barstool's well-established following will enable Penn to spend virtually nothing on external marketing. By contrast, DraftKings spent roughly $203 million in its last quarter alone to maintain brand awareness and market share. And despite the wide gap in marketing spending, Barstool Sportsbook broke DraftKings' record for opening weekend downloads when it debuted in Pennsylvania late last year -- and the market share of its product continues to grow.

DraftKings does have a market-share lead in Pennsylvania over Barstool, but its product had been available for several more months, its lead is shrinking, and Barstool Sportsbook already leads in terms of revenues.

Barstool's product debuted last month in Michigan to an even warmer welcome, with 68% more in first-time deposits than it saw in its debut in Pennsylvania. Its combination of popularity and a low-spend model is ideal in a sports gambling sector where margins are  somewhat low. The sportsbook is set to open in eight more states during 2021. 

Regardless of the help that Barstool will be able to provide, Penn will still need to invest in building out its gambling products nationally. Considering this, it's encouraging to see that company's brick-and-mortar casinos have so quickly returned to strong profitability. Those will provide a consistent source of funds to fuel the company's expansion, while DraftKings remains fully entrenched in cash-burn mode.

Barstool helps everywhere

Barstool Sports offers more to Penn National's business than just the new digital sportsbook. The sports-media conglomerate also boasts two of the top 20 podcasts in the nation, and set profitability records in 2020 thanks to these assets as well as advertising and merchandise sales. And the company did so despite the long hiatus of live sports last year.

Furthermore, Penn is actively transforming its portfolio of casino properties to Barstool's brand in order to best leverage the clout of that name. To get a feel for what impact this will have, look no further than the company's East Chicago location. In the days following its Barstool rebranding, sports betting at the casino rose 35%, table volumes rose 27%, and slots volumes rose 26%, all week over week. All Penn has to do is associate its assets with Barstool and let the magic happen. The acquisition is even boosting Penn's legacy loyalty program, with 15% of its Michigan gamblers already signing up.

Finally, in the coming months, the duo plans to open up standalone entertainment destinations in urban centers to build on its omnichannel approach.DraftKings may be able to build a successful sports gambling business, but Penn is doing so while building much, much more.

Penn is poised to dominate

This is not to suggest that DraftKings is a bad investment idea. Cathie Wood is brilliant and DraftKings could certainly find meaningful success.

Still, in my view, Penn's acquisition of Barstool Sports will go down as one of the best M&A decisions of my lifetime. (And I'm in my 20s.) Barstool has everything Penn needs to succeed and more. As a shareholder, I'm excited to watch this company grow over the long-term, and think you should consider adding it to your portfolio as well -- even in the wake of the stock's recent gains.