In the gambling industry, there isn't a lot of hiding what you are as a company. If a resort is built and people don't visit, that's easy to see. If room rates are low, that's easy to see. If table revenue is lower than the competition, it's easy to find that out. And if people aren't using your online sports betting app as much as expected, investors will soon find out. 

When Penn National Gaming (PENN -5.58%) became a favorite pandemic growth stock in 2020, it was surprising to me as a longtime gambling industry observer. Penn National has traditionally been a well-run company, but it wasn't in a particularly attractive market position versus companies with exposure to the Las Vegas Strip, Macao, or Japan. It had a partnership with Barstool Sports but didn't have an online gambling business to speak of. Yet share prices of Penn National jumped 238% during 2020 in the hope that it would be a giant in online gambling. The air is quickly coming out of that balloon, and businesses that are taking market share are where investment dollars are flowing. 

PENN Chart

PENN data by YCharts.

Penn National's Barstool bet is on shaky ground

iGaming, which encompasses sports betting but also online casino betting, poker betting, or online video gaming, etc., has been booming since the pandemic began. But Penn National was slow to enter the market. It is trying to make a splash with a partnership with Barstool Sports, developing the Barstool Sportsbook mobile app. In theory, this would give Penn National a higher profile in online gambling and would attract the large Barstool customer base.

In reality, Penn and Barstool are late to the online betting market. MGM Resorts (MGM -1.15%) said last week that it had the No. 1 market share for online sports bets and iGaming in August 2021, with its share growing, and DraftKings (DKNG -5.02%) and Flutter Entertainment's (FLUT -0.67%) FanDuel are leaders on the sports betting side.

The challenge in online betting is that no one is making money today as everyone tries to take market share. DraftKings and Flutter have high valuations, which allow them to raise money to spend on partnerships, marketing, and customer acquisition. MGM has a huge casino business to fund its online gambling strategy. Penn National is a big company but doesn't have the name recognition of these rivals in online gambling. 

It was Barstool that was supposed to bring name recognition to the online gambling business, but we're seeing the downside of that partnership. Last week, a Business Insider article highlighted potentially troubling behavior by Barstool founder David Portnoy, which could turn off investors and customers. Barstool has a strong (but niche) brand that could end up being a liability as Penn National tries to expand the betting business beyond that niche demographic. 

It's too early to know exactly how Penn National's online betting business will perform. Management gave very little detail about the operation except to say that losses would be only $20 million in the fourth quarter. But we don't know what the company's market share is or where it will stand against competitors in the future. 

Person making a bet on a game online.

Image source: Getty Images.

Is the bubble bursting? 

The air is coming out of the online gambling business across the market. DraftKings and Flutter are trading sharply lower than their highs earlier this year, and we have seen growth slowing across the board. 

Looking at Penn National's market cap over the last three years shows just how quickly the company's value increased during the pandemic on speculation this could be an online gambling giant. Now that it's come time to show it can be, investors might be disappointed with the results. 

PENN Market Cap Chart

PENN Market Cap data by YCharts.

If you're looking for exposure to the online gambling market, I think there are better places to look than Penn National. MGM, DraftKings, and Flutter all have high market shares and have invested for years in building their brands. Penn is making a niche play with Barstool, but that could limit its upside. And with only a few companies likely to win in online gambling long term, I think Penn National is one that could lose out.