The landscape of the burgeoning sports gambling arena underwent significant upheaval due to the pandemic’s effects. The widespread lockdowns and stay-at-home mandates dealt a severe blow to the live sports betting sector, leading to extended closures that impacted events ranging from March Madness to the Olympics.
Nonetheless, the industry has been steadily reclaiming its vitality in the years following the pandemic, especially the offline segment, which bore the brunt of the crisis. According to a Grand View Research report, the global sports betting sector is poised for robust growth, with a projected Compound Annual Growth Rate (CAGR) of 10.3% until 2030.
Unexpected players like Disney (NYSE:DIS) are entering the scene, as the media and entertainment giant recently announced a significant investment in the sports betting domain. But the question arises: should investors follow suit and place their bets on the sports gambling industry? Let’s delve into two prominent contenders to determine which stock is better positioned to capitalize on the industry’s positive trajectory.
DraftKings: A Deep Dive
Founded in 2012, DraftKings (NASDAQ:DKNG), headquartered in Boston, swiftly rose to prominence as a leading figure in the online sports betting sector, capturing a 32% market share as of May 2023 – a close second to FanDuel. With a market capitalization of $23.78 billion, DraftKings facilitates betting across major leagues such as MLB, NHL, NFL, NBA, Premier League, and UEFA Champions League.
The performance of DraftKings’ stock in 2023 has been remarkable, boasting a year-to-date surge of 150.5%, comfortably outperforming the 37.6% rise of the Nasdaq QQQ Invesco ETF (QQQ).
In its most recent quarterly results, DraftKings demonstrated robust figures. The company recorded revenues of $874.9 million in the second quarter, marking an impressive annual upswing of 87.7%. This figure significantly exceeded the consensus estimate of $762.2 million. The company also managed to narrow its losses from $0.50 to $0.17 per share compared to the previous year, surpassing the consensus loss estimate of $0.24 per share.
DraftKings has consistently reported rising revenues over the last four quarters, with earnings surpassing analyst predictions in four out of the past five instances. Operational metrics also displayed improvements, with average monthly unique payers (MUP) and average revenue per MUP posting gains compared to the previous year. The average MUP for the June quarter reached 2.1 million, marking a 40% year-on-year increase, while average revenue per MUP rose by 33% to $137.
The company revised its revenue guidance for FY 2023 upwards, now anticipating a range of $3.46 billion to $3.54 billion. This adjustment reflects an increase from the previous guidance of $3.135 billion to $3.235 billion.
Market analysts are optimistic, forecasting healthy earnings growth for the upcoming quarter and FY 2023. The anticipated growth for the December quarter stands at 115%, while EPS growth for FY 2023 is projected at 49%.
Penn Entertainment: A Close Examination
Established in 1982, Penn Entertainment (NASDAQ:PENN) has an extensive history in the betting sector. With a presence in both online and offline realms, the company boasts 43 properties spread across 20 states. Penn Entertainment carries a market capitalization of $3.87B and owns recognizable brands like Hollywood Casino, Ameristar, and Boomtown.
Unlike DKNG, Penn’s performance in 2023 has been lackluster, experiencing a decline of over 21% since the year’s commencement. This performance not only lags behind DKNG but also falls short of the broader QQQ benchmark.
However, the company’s recently announced second-quarter results exceeded Wall Street’s expectations. Penn Entertainment (NASDAQ:PENN) recorded revenues of $1.67 billion in the April-June period, reflecting a modest growth of 2.9% from the prior year. The growth was primarily driven by gains in the Interactive segment, offsetting less impressive gains in other key revenue segments across different regions of the country.
In contrast, EPS witnessed a substantial surge, soaring by 220% from $0.15 to $0.48. Penn Entertainment has outperformed bottom-line estimates in three out of the last five quarters, with quarterly results ranging from a loss per share of $0.15 to an EPS of $3.05.
The recent partnership announcement by Penn has garnered considerable attention. A few days ago, Penn Entertainment entered into a $2B deal with Disney’s ESPN to rebrand its Barstool Sportsbook as ESPN Bet. This ten-year agreement entails Penn paying $1.5 billion for the licensing deal and offering rights worth approximately $500 million to purchase shares in Penn. In return, ESPN will grant Penn the authority to operate ESPN Bet and provide “unspecified access” to ESPN talent. This deal also enabled Barstool founder Dave Portnoy to regain control of his company from Penn, subject to non-compete and other stipulations.
As these developments unfold, analysts remain divided in their assessments of Penn Entertainment’s growth prospects. Wall Street predicts a 44.4% earnings decline in the September quarter, followed by a remarkable 238% growth in the fourth quarter.
Valuation Considerations
From a valuation perspective, Penn Entertainment (NASDAQ:PENN) appears more attractively priced compared to DraftKings, which aligns with the considerable divergence in their share price performance this year.
DraftKings (NASDAQ:DKNG) presently holds a price-to-sales (P/S) ratio of 4.27 and a price-to-book (P/B) ratio of 12.85. Both metrics significantly surpass Penn Entertainment’s respective P/S of 0.64 and P/B of 0.99.
Final Insights
Analysts suggest that DraftKings (NASDAQ:DKNG) is poised to outshine its counterparts, including Penn Entertainment. The consistent rise in revenues, narrowing losses, and growth in key operational metrics position it strongly to further solidify its dominance in this sector.
On the contrary, Penn Entertainment (NASDAQ:PENN) lags behind its upstart competitor. Despite relaunching its sportsbook app, it will likely take time for Penn to challenge DraftKings’ position. Additionally, I maintain the perspective that Penn’s deal with ESPN falls short, considering the substantial financial commitment in exchange for seemingly limited returns.
In conclusion, for investors seeking to ride the growth wave of this burgeoning industry, DraftKings (NASDAQ:DKNG) appears to be the more promising gambling stock to consider.
Featured Image: Megapixl @ Rafaelhenriquepress
Author Faith Yakubu