In 2018, the U.S. Supreme Court made federal sports betting legal in its Murphy vs. NCAA case. Since then, countless sportsbooks and online betting platforms have popped up around the country, trying to get a piece of the pie.
Penn Entertainment (PENN -1.92%) was no different. Having already been a casino operator, the company entered sports betting with its $551 million acquisition of Barstool Sports. Penn paid $163 million for a 36% stake in February 2020 and then $388 million for the remaining stake in February 2023.
The partnership was, by most accounts, a failure in Penn's plans for sports betting, as the company sold Barstool back to its founder in August 2023 for $1 and rights to 50% of the proceeds if Barstool has a liquidity event like selling the company.
Needless to say, Penn investors haven't been satisfied with recent moves, with the stock down just under 20% this year. However, it could make a good entry point now for investors.
An ESPN deal may be just what the company needed
Penn and Walt Disney's ESPN recently inked a 10-year deal, making the company the exclusive betting partner for the platform. As part of the deal, Penn will pay ESPN $1.5 billion over 10 years and grant it around $500 million in stock warrants to purchase around 31.8 million Penn shares.
In return, ESPN will provide marketing services, media, brand rights, and other rights. As ESPN is arguably the most notable name in sports media, this could prove to be a big deal for Penn. In fact, it will almost have to be if the company plans to continue operating in the space.
Right now, Penn lags far behind top players like FanDuel, DraftKings, BetMGM, and Caesars in market share, but natural brand recognition and marketing coming from a company like ESPN should be the catalyst it needs. For perspective on how valuable the marketing could be, FanDuel spent $616 million this year, and DraftKings spent $207 million in its second quarter alone.
U.S. sports betting is still in the early stages
While the Supreme Court's decision made sports betting legal on the federal level, each state dictates whether they'll allow it. Currently, 34 states and Washington, D.C., allow some form of legalized sports betting.
California, Florida (it's going through court proceedings), and Texas are notable states that don't allow it. Why are these three notable? Because they account for close to a third of the U.S. population. That's a lot of untouched market that has the potential to change in the near future.
At some point, you imagine the potential tax revenue from legalizing sports betting outweighs the states' arguments against it. The U.S. has made $3.47 billion in tax revenue from sports betting since June 2018.
It also helps that the current U.S. sports betting market is expected to have a compound annual growth rate (CAGR) of 10.4% through 2030.
Penn's stock is cheap enough to take the risk
Penn's recent stock price woes shouldn't cause too much concern. If anything, it presents a compelling opportunity for potential investors. The stock is around the lowest it's been since May 2020, and its price-to-earnings (P/E) ratio is 5.4, which puts it into value territory.
Penn is trading at a significant discount to its peers, and the breath of new life from the ESPN deal should give the company lots of upside if things go well. It doesn't even have to go great for investors to see decent returns on their investment -- just well enough.
