Don't chalk up March's losses to anything Penn did in terms of financial results; after all, the company beat revenue expectations on its fourth-quarter report back in February. Notably, Penn's interactive sports betting and iGaming segment, bolstered by the 2020 acquisition of Barstool Sports and last year's acquisition of Score Media, grew like gangbusters, up 257%.
However, March saw not one but three elements that negatively affected sentiment for Penn's stock. First, rising inflation numbers threaten to take a bite out of consumer spending power (and therefore, gambling power).
Second, a powerful private equity firm announced it may be entering the online sports betting arena, with a big-name rival brand behind it. That could lead to another deep-pocketed competitor entering the space.
Finally, two different state regulators announced they were looking into allegations against Barstool Sports founder, large Penn shareholder, and media figure David Portnoy, who became the target of sexual misconduct allegations last year.
On March 2, it was reported that private equity firm Apollo Global, which purchased Yahoo! from Verizon Communications last year, was looking to merge its Yahoo! Sports assets with a sports betting company. The online sports gambling industry has seen intense competition, with several entrants spending big on customer acquisition. So, the potential for another big-name fantasy sports brand entering the space was not what Penn National shareholders wanted.
Of note, Apollo hasn't settled on a deal, and it may still not happen. Still, the report wasn't taken well by the sector's investors.
Penn's stock fell a lot after the Apollo-Yahoo! news, although early March wasn't a great period for the stock market, either. Things didn't get any better when regulators in Nevada and Indiana said they were looking into sexual misconduct allegations against Portnoy and Barstool.
These allegations have been around since November, and Penn's stock has tanked since then -- although again, many expensive growth stocks have fallen significantly over that period as well. Portnoy has denied the allegations, and filed a defamation lawsuit against Insider, the publication that first published the allegations late last year. Furthermore, Penn CEO Jay Snowden has fully supported Portnoy. Still, news of regulators getting involved likely didn't help sentiment for Penn's stock.
Finally, March also gave investors a tough month, with high inflation and low consumer sentiment numbers. As a consumer discretionary stock, Penn had to weather not one but three big headwinds working against it. No wonder it declined so much.
For those interested in the newly legal online gambling sector, Penn may be worth a look, as the stock is down 70% from its all-time highs of early 2021.
Assuming one is OK investing in gambling stocks and can look past the accusations levied against Portnoy (who is a large shareholder, but not CEO), Penn has some interesting differentiation versus other online sports gambling stocks. The big difference is that Penn uses its casinos and the Barstool digital media empire, including podcasts and the website, to acquire customers, rather than spending massive sums on digital ads and incentives.
The advantage of lower consumer acquisition costs is highlighted in a big way in Penn's investor presentations. In them, management claims Penn only spends around 30% of net gaming revenue on customer acquisition, while competitors -- even the biggest and well-known in the industry, spend a far higher percentage, over 100% on average.
With the stock down so much and a distinct point of differentiation, Penn may be worth a look, now that it trades at a more reasonable valuation.