Betting on Betting with Penn National Gaming
With respect to baseball, the doldrums of the summer sports drought are nearly over. College football is back this week, NFL is back next week, and European soccer is in the full swing. And what comes with the Fall sports season, other than constant drinking and yelling about if Patrick Mahomes could take Lamar Jackson in a fight? Betting on those sports! Now, thanks to the ubiquity of smartphones and mobile apps, you no longer have to go to your friend's friend's bookie in order to place a bet you may never see again. You now have a myriad of options at your fingertips to bet on spreads, over/unders and that one parlay you know you're going to hit but that last leg could really screw you at the end. Today, we'll be taking a look at one of the more divisive sports betting companies on the market: Penn National Gaming.
Market Capitalization: $12.81 billion
Full Year 2020 Revenue: $3.58 billion (-32.50% YoY)
Q2 2021 Revenue: $1.55 billion (+405.99% YoY)
Q2 2021 Net Income: $198.7 million (+192.89% YoY)
How Did Penn National Gaming Get Started?
This is actually the oldest company I've dug into to date, starting back in 1968 in Pennsylvania after the state enacted a law allowing betting on thoroughbred horse racing. A group of Pennsylvania businessmen gathered together investors to create the Penn National Race Course, a complex which included a horse racing track and motor speedway, fully opening in 1972. By 1993, they had purchased several outer-lying struggling race tracks and were conducting over 100 nights of racing per year, each generating huge betting revenue.
In 1994, the company went public under the leadership of Peter M. Carlino, son of founder Peter D. Carlino. The company raised $18 million in their IPO which paid off debts, funded construction of "off-track betting parlors" and allowed them to expand outside of Pennsylvania.
Throughout the mid-2000's, the company bought and sold other, smaller regional operators, including a failed bid for Harrah's Entertainment. They eventually became the third largest publicly held gaming company in the United States in 2005 after the purchase of Argosy Gaming Company, allowing Penn to expand into the American southeast. In 2012, they made a very important business move in the history of the company: they spun themselves off. They housed most of their physical real estate under a new REIT to reduce taxes, cost of capital and navigate the murky world of gambling license restrictions. This allowed Penn proper to continue their expansion of the gaming business. They continued expansion, buying and selling until arguably their most important acquisition in history: the acquisition of a 36% stake in Barstool Sports for $163 million in January 2020. The Barstool purchase opened them up to a completely new demographic, and added a new weapon to their arsenal who we'll touch on later. Finally, they purchased Score Media and Gaming for $2 billion in August of this year, giving them great exposure into Canada.
What's The Business?
If you haven't figured it out by now, they're a gambling company. They are still considered a "regional casino operator," but as described above, they've been aggressively expanding outside of their home region of New England. They generate revenue in a few different ways:
Outright ownership and operation of casinos and betting parlors, generating revenue through the gaming.
Land leases. Their spun-off REIT charges rent to other gaming companies for land that they own and others operate on.
Management of other casino/betting operators, charging a management fee.
Sports books, both digital and physical.
However, their expansion can only be so aggressive due to state gaming laws that prevent them from moving into specific states that do not yet allow gaming (shout out to my home state of Georgia).
Will I Invest In Penn National Gaming and Barstool Sports?
I have to be honest: I'm incredibly disinterested by the horse racing part of this company. I think the revenue on horse racing and "off-track betting parlors" is capped, and the ceiling is getting lower as the population becomes more outspoken around the treatment of these animals. The part of this business I think will drive the most revenue is the Barstool Sports deal, so let's get into it.
The acquisition of Barstool Sports was a masterstroke by the executive team at Penn National Gaming. This took them from sleepy, old-timey operator to suddenly the new kid on the block. They are now the most forward-thinking, millennial embracing sports betting operator out there, just by making this one move. I also mentioned at the top that they added an incredible weapon to their arsenal. His name is Dave Portnoy, and he's the President and Founder of Barstool Sports.
Portnoy is, to put it kindly, a lightning rod. His methods are unique, often very divisive and can leave a sour taste in your mouth, but my word if he isn't effective. Portnoy is one of the most effective marketers today, and can pretty much sell anything to anyone at any time. He has taken Barstool from a literal sports newspaper based out of Boston in 2003 to one of the biggest brands on the internet. Hell, he even took the “One Bite” brand where he rates pizza shops from joke bit to star-studded event and even now his own frozen pizza brand.
Barstool generates revenue in many different ways. First and foremost is advertising. They are an advertising powerhouse, having incubated the biggest sports podcast in the world in Pardon My Take, and provided the launchpad for Call Her Daddy, which recently jumped to Spotify in a $60 million deal. They also recently concluded their deal with Sirius XM, bringing all of their shows in house. They also sign A-list talent for their shows to bring in bigger ad deals, including recent hires Will Compton of the Tennessee Titans and Deion Sanders, now head coach of Jackson State football. They also invent new avenues to gain advertisers, with Portnoy starting his own stock market live stream, nicknamed "Davey Day Trader," that now has its own sponsorship deals.
The next avenue is merchandise, and this is the area they are probably the best in the world at. The aforementioned Davey Day Trader has its own "$PENN" merchandise, including hats and t-shirts. They create merchandise for internet trends that they themselves create, like the "Zillion Beers" promotion or "Coach Duggs" in 2020 when they actually teamed up with the University of Tennessee to create officially licensed products. I also mentioned that Portnoy is a genius. Here's why: in Call Her Daddy's much publicized split from Barstool earlier this year, Portnoy allowed the release of the intellectual property to the creator and host, Alex Cooper, in exchange for the merchandising rights to the show. They are selling merchandise for a show that one of their competitors owns. Incredible work.
The biggest potential revenue driver for Barstool, and Penn, moving forward is the Barstool Sportsbook. The highly anticipated Barstool Sportsbook was unleashed in 2020 in a couple of states, with more being added as sports betting becomes legalized. They also have several physical locations, which Barstool rolls out the top-tier talent and red carpet for with each location launch. In the 7 months reported after the launch of the digital sports book and physical location, Penn took in $660 million in handle, of which $61 million was pure profit. According to Portnoy’s own tweet, this was good enough for a 13% market share with “0 advertising spend,” showing the real power of the brand. With more states looking to legalize sports betting to make up for the record tax shortfalls caused by the pandemic, look for Penn to continue to capitalize on this business with aggressive expansion.
Finally, Barstool is getting into the streaming game. First, they are sponsoring a college football bowl game this coming season, now the name sponsor of the "Barstool Sports Arizona Bowl" in Tucson. Taking place December 31, the game will take place exclusively on Barstool's live stream on their website, and will have play-by-play from Barstool talent. They are one of the first bowl games to take the digital plunge, and could be a sea change moment in how bowl broadcasts function in the future. The second, and much more controversial, move from Barstool is currently a rumor, but has been reported several times in the last month: Barstool is eyeing Major League Baseball. The MLB, by nature of the number of games played every season, has several broadcasting partners to shoulder the load. In the most recent round of contract renewals, ESPN dropped the Monday and Tuesday streaming deal, leaving a void in the programming. This slot has been shopped around, according to The Washington Post, to NBC via Peacock and Alphabet via YouTube TV. However, in a video statement posted to Twitter, Portnoy teased "a high profile deal with one of the big four American sports leagues." The advertising revenue possibilities here could be endless, and could see further expansion should the MLB deal be successful.
Let's cover the first risk quickly, because the list is about to get pretty long. The first risk is that sports betting is not legalized everywhere. This seems unlikely, but possible. This could immediately cap any sort of expansion of revenue the company could see moving forward. It would also adjust the revneue expectations of the company relative to the digital overhead of the sports book, potentially sending higher percentages of revenue out the door to their sports book back-end provider,
OK, elephant in the room time: the biggest risk to this business is Portnoy and his corporate culture. I personally think the man is a marketing visionary, but it's a thin line between genius and madness or however that saying goes. This man rides that line like he just chopped it up on a mirror. Product Mint has put together an excellent list of the scandals to come directly from him or Barstool in the last three years. Here are some of the bigger ones:
2017 - ESPN signs Barstool talent "Big Cat" and "PFT Commenter" of "Pardon My Take" to a late-night sports interview show. After public comments from ESPN's Samantha Ponder accusing Barstool of mysogeny and sexism, the show is cancelled after one episode.
December 2018 - stolen content from a comedian goes uncredited
August 2019 - Portnoy makes public threats on Twitter to fire anyone that discusses labor unionization at Barstool
2019 - Leaked employment documents allegedly show clauses in a new hire's contract that prohibits the reporting of racism, nudity, profanity "and more."
2020 - Barstool releases a video of Portnoy singing the N-word.
2020 - Portnoy interviews the-President Trump at the White House, enraging employees of the company including foundational member Dan Katz, who spoke out publicly on the issue.
2021 - Barstool is sued by Michael Rapaport for defamation. This claim was dismissed.
2021 - Portnoy was briefly suspended from Twitter, for reasons on which Twitter refused to comment.
It's also worth noting that Barstool's attempt at the MLB contract I described above is...not popular. Words like "risks fan blow back," "cowardice" and "colossal error" abound around the deal. Online sentiment is very mixed towards the company and their culture, but it's tough to ignore their strength in the sector.
The Bottom Line
To me, this is a similar, but less shady, version of my Palantir analysis a few weeks ago. The company is rock solid. The financials are improving with the spread of their digital products, and they are showing an impressive 10% take rate on the betting hold they receive. As sports betting becomes more ubiquitous around the world, Penn looks very well positioned to capitalize on the non-Vegas market. Their acquisition of Score Media is a big, under-the-radar win for them with the ability to effectively take over the Canadian sports betting market. I really love this company from an investment standpoint, despite my questions around Barstool's culture and Portnoy as a wildcard. If you love him, you love him. If you hate him, you hate him. I happen to love him, which is why to me, I am long on Penn National Gaming.
This article is for educational and entertainment purposes only. Please do your own research. Do not buy or sell a security based solely on what you read here. This author has a long position in Penn.