Penn Entertainment (PENN -1.92%) was one of the market darlings during the pandemic as investors thought it could play a big role in online gambling after the Barstool Sports acquisition. But Barstool was never a great fit within Penn Entertainment and earlier this year the company sold Barstool back to Dave Portnoy just months after completing the $500 million acquisition.
On top of the Barstool debacle, the 2018 acquisition of Pinnacle Entertainment left the company with $2 billion of debt just in time for the pandemic to impact the business. The upside investors saw in Penn Entertainment a few years ago seems to have faded, but does that leave investors with an opportunity to buy the company at a discount?
From boom to bust
The chart below shows the wild path Penn Entertainment has been on. The stock exploded only to drop to below pre-pandemic levels. Operationally, revenue has grown, but not in line with Las Vegas-focused peers who have seen record revenue on the Las Vegas Strip.
Debt from the Pinnacle Entertainment acquisition isn't debilitating, but it's becoming more costly as interest rates rise and the use of cash (like the Barstool acquisition) looks more like a mistake in hindsight.
PENN EBITDA (TTM) data by YCharts
Keep in mind that Penn National is also a regional casino operator. The regional gambling market held up well during the pandemic, but historically it hasn't been a high-growth market and supply is only increasing as states add gambling to their revenue mix. Unlike Las Vegas, most of Penn Entertainment's casinos aren't destinations and I think that caps growth. Five years from now, Penn Entertainment may do well just to keep up with inflation and economic growth.
Online gambling becomes a cost center
Penn Entertainment has also not given up on being a player in online gambling. But it's not a leader right now and this has become a money loser for the company.
In the last 12 months, Penn Entertainment burned $239 million on the interactive business and recently signed a $1.5 billion deal with Walt Disney will become another cost center. It's not clear if that investment will ever pay off as online gambling losses mount at Penn Entertainment and competitors across the industry.
DraftKings (NASDAQ: DKNG) is instructive here because it's the biggest public company that focuses on online gambling. You can see below that even a large market share hasn't led to free cash flow for the business. 
DKNG Free Cash Flow data by YCharts
It's very possible the Disney deal will make the online gambling losses worse for Penn Entertainment.
Penn Entertainment isn't the value that it seems
You can see below that Penn Entertainment's enterprise value-to-EBITDA multiple of 5.1 looks cheap, but competitors like MGM Resorts International and Caesars Entertainment are trading for similar multiples. And they have the upside of being in Las Vegas, which is growing, and MGM has casinos in Macao and one under construction in Japan. I think they're better positioned strategically.
PENN EV to EBITDA data by YCharts
In five years, I think Penn Entertainment will underperform its larger rivals who have better physical locations and more scale to grow in online gambling. Penn National was a hyped stock during the pandemic, but financial results haven't backed up that optimism.
