svetikd
Looking for small-cap companies with explosive upside potential over multi-year horizons
With the rally in small-caps already underway, investors will start looking at what types of stocks could end up representing 30% to 50% upside opportunities over 18- to 24-month time periods.
One such company that is speculative in nature but has confluence in place to potentially stage such a move is PENN Entertainment (NASDAQ:PENN) as sports betting continues to grow in popularity. Peers alongside PENN such as DraftKings (DKNG), MGM (MGM) and Caesars (CZR) are also likely to ride this growing market trend.
While it may be an aspirational dream for PENN Entertainment to ever revisit its 2021 QE-fueled highs, a more practical target is neckline resistance at 35/share, offering current entries nearly 40-50% potential if PENN’s management team can execute well in their marketplace on ESPN Bet.
It’s important to note that for such upside to take place, naturally, it will take time to play out and require investors’ patience.
PENN Entertainment (Monthly Candlestick Structure) (TradingView)
PENN Entertainment is a developing and renowned small-cap player in the gaming industry, and its roots can be traced back to being a racetrack operator. Lately, the company is posting a single-digit profit increase given its main exposure to land-based casinos (stable (a competitive business without a strong moat), but it has the opportunity to achieve a double-digit expansion profile if its sports betting business strategy pays off. Currently, 90% of its profits come from brick-and-mortar casinos and the remaining 10% from its new sports betting and online gambling in its business segment called PENN Interactive.
The thesis that PENN’s positive prospects lie in its 10% profit segment of PENN Interactive, the sports betting segment, and how it will temporarily grow over the long term as a component of its business mix.
After PENN sold Barstool Sports to its founder Dave Portnoy, the company made a big bet (no pun intended) on long-term sports with an ambitious deal with ESPN under a new logo now known as ESPN BET. PENN hopes to take advantage of ESPN’s 400-channel network. millions of users to increase the visibility of your online gaming platform.
It is through this express corporate strategy of partnering with ESPN that PENN hopes to increase its current 10-11% percentage of the U. S. gaming market. U. S. Centers for Teens through the end of this decade. Currently, Caesar has about 18% of the market, while MGM has about 20% of the market share. PENN is aiming for a 15-20% market share through its ESPN Bet partnership.
Right now, here’s the estimate of the user base across the industry:
PENN has been the loser lately and hopes the partnership with ESPN will attract more users to its network. ESPN has around 400 million fans on social media, so this partnership can prove profitable for PENN if executed correctly.
PENN Entertainment Partners with ESPN (ESPN BET)
The terms of the deal between PENN and ESPN includes the following:
Based on PENN’s internal projections, the company estimates that it may earn between $500 million and $1 billion in EBITDA over the next 3 to 4 years from ESPN BET. These projections are based on a market share of 10-20% for online sports and 8-16% for iGaming. These figures will require some percentage gains in the market, but they can be achieved within 3-4 years with their new partnership deal with ESPN.
DraftKings (one of PENN’s biggest competitors) saw a 10% drop in one day in August 2023 after PENN announced its partnership with ESPN. It is clear that the institutional focus is on the percentage of the market that PENN can obtain through this new agreement at its expense. of the existing giants.
The gambling market in the United States is more competitive than the gambling market in Asia, where there are fewer casinos but a much larger population interested in gambling.
ESPN Bet’s launch on the App Store in November is physically powerful and is now No. 3 in sports when I reviewed the app recently. Staying in the App Store’s top five in the Sports category is, in my opinion, incredibly vital to PENN. inventory pricing as it provides clues as to the progression of market percentage gains that will be discussed in the coming earnings quarters.
ESPN Bet Penetration Rate (BOFA)
ESPN Bet App Stats (BOFA)
Bank of America’s research team estimates that PENN has a 6-7% share of the online sports betting market, and that figure may increase to double digits if ESPN Bet is successful. According to BofA’s estimates, the next 1% that accumulates in the market share would go up about $2 to the price of PENN’s percentages. Therefore, if PENN manages to increase its market share to 5%, BofA believes it could simply increase around $10/percent to PENN’s existing 25 levels.
Overall, PENN remains a small player in the broader market, as shown by the market share presented below.
Online Sports Betting Market Share (JPM)
The biggest threat to investors is that PENN will be heavily leveraged, and while its debt won’t mature until 2026, when it arrives, it will be a significant liability that will particularly hamper the flow of operating money. In the gaming industry, PENN has the second-highest percentage of variable debt compared to fixed-rate debt. This means that PENN stock is also a roundabout bet that rates will be lower than they are in the next few years (a fair view in my opinion).
Given its reputation as a small company, how PENN manages its balance sheet will affect its ability to fund long-term expansion projects. Therefore, management’s feedback on its leverage plans will be critical for credit and equity investors.
Capital Structure of Gaming Companies (BOFA)
The most obvious risk to PENN entertainment’s stock is if ESPN BET is a flop. But initial signs show that the app potentially has staying power and if its momentum continues, the long term estimates for PENN’s EBITDA will rise and its share price will follow.
The company’s projected earnings of 40x and EV/EBITDA valuation multiples of 5. 3x mean investors see promising expansion ahead.
Data via YChartsData via YCharts
Given that it PENN stated that it may earn $500M-1B from ESPN Bet leading up to 2027, I rate PENN as a long-term speculative buy with 50-100% return potential. Speculative positions should be treated as such with smaller sizing and thought of having a wide range of outcomes.
To participate in this name, I plan to enter LEAP calling features into PENN to allow enough time for the company’s ESPN BET aspiration to materialize with consumers and gain market share.
I’m also a long-term positive on the gaming sector, which includes DraftKings, Caesars, and MGM as a themed basket. Since it’s hard to know which one will be successful, buying the entire theme can also be a smart strategy.
This themed basket in games is highly volatile, so it’s vital to know that the stock in this basket moves with a beta of 1. 5 to 2. 5X compared to the S.
Finally, this organization of stocks depends on keeping the U. S. economy on its current trajectory. If unemployment skyrockets, this basket will be seriously affected. People will be much less likely to gamble if they are unemployed.
This article written by
Analyst Disclosure: I/we maintain an advantageous long position in PENN stock, whether through shares, features or other derivatives. I wrote this article myself and it expresses my own opinions. I do not receive any reimbursement for this (other than Seeking Alpha). I have no relationship with any company whose stock is discussed in this article.
Seeking Alpha Disclosure: The above functionality does not guarantee long-term results. No advice or recommendation is given as to whether an investment is suitable for a specific investor. Any views or reviews expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a stock dealer, investment advisor, or licensed investment bank in the United States. Our analysts are third-party authors who collaborate with professional investors and individual investors who are authorized or qualified through any regulatory institute or body.