Before I dive into an analysis of Penn National Gaming (NASDAQ:PENN), I must admit something: the temporary silencing of sports has been one of the bright spots of the novel coronavirus, at least for me. During quarantine, I realized just how silly the concept of sports is. Honestly, if all sports leagues collapsed – including America’s religion, the NFL – I wouldn’t give a rip. I mention this because it might color my attitude toward PENN stock.
Having said that, I recognize that I’m probably in the minority. Furthermore, professional sports isn’t just an institution to which millions of Americans devote themselves. Rather, sports is vital to the economy. Sure, everyone loves to crack jokes about the athlete who gets paid big bucks to play a kid’s game. But every live event supports a vast supply chain, from broadcasters to advertisers, to food vendors down to the consumer.
Therefore, the gaming ecosystem isn’t just valuable for direct beneficiaries like PENN stock. Without sports, a huge chunk of our consumer-based economy will go down the toilet. So, even if you’re a killjoy like me, the return of sports is a positive development.
And that’s the main reason why PENN stock has skyrocketed since the second half of March. Before the national lockdown, several investors were excited about Penn National’s acquisition of Barstool Sports, a controversial though incredibly popular sports media site. With it, Penn can bolster its sports betting ambitions.
Obviously, the coronavirus shut down those plans. However, with most states gradually lifting their restrictions, the case for PENN improved dramatically. Still, here are three questions to ask before taking the plunge.
What Will the New Normal Look Like for PENN Stock?
Although millions of Americans are excited about the prospect of reclaiming their lives, a reopening doesn’t necessarily mean a return to business as usual. Naturally, many governmental leaders are pensive about reopening high-contact businesses, such as casinos, to their former capacity.
Even with top-level approval, many casino operators are incentivized to resume operations responsibly. With the consumer economy in such bad shape, the last thing you want to do is scare them off. Thus, casinos most likely will implement heavily mitigated protocols as part of their new reality.
But I’m most curious about how sports gambling will change in the post-pandemic era. Particularly, bookmakers take into account multiple factors, such as home-field advantage, when determining the betting line.
Well, that’s kind of a problem. When traditional sports like basketball, baseball, and later football return, they’ll likely do so without fans. Thus, the whole concept of home-field advantage goes out the window.
Interestingly, we have some precedent for this very scenario. After violence broke out in 2007, Serie A, Italy’s premiere soccer league, decided to play games without fans. This resulted in home-field advantage falling by 80%.
Admittedly, I’m very ignorant about how sports gambling works. But if you have such a dramatic variable impacting the game, it could cause ripple effects in the gambling industry. From my perspective, that doesn’t seem to be a net positive for PENN stock.
How Likely Is a Second Wave of the Coronavirus?
If you watch a liberal news station like CNN, you’ll hear pundits warn about the probability of a second wave of the coronavirus, especially if people ignore social distancing guidelines. If you watch Fox News, their talking heads will claim that this is nothing more than Democratic fear mongering.
So, who’s right?
At this point, the fairest answer is that we won’t know until we know. While global public health officials have warned about a boomerang effect and that it’s too early to return back to our normal routine full swing, we also can’t stay quarantined permanently. A devastated economy will render its own health costs.
However, one dynamic that hasn’t gone unnoticed is that blue counties have disproportionately suffered more than red counties. Logically, liberal strongholds tend to feature powerful economic engines, which leads to larger and more crowded populaces. Therefore, a disease like Covid-19 can spread faster.
As well, it appears that herd immunity has been more difficult to achieve in heterogenous populations. For instance, countries like Nigeria, Russia, and China have very low deaths per capita relative to diverse countries like the U.S. and the U.K.
Unfortunately, this might impact PENN stock in that many of the big sports towns feature diverse populations. Thus, if we suffer another wave, our nation could suffer disproportionately yet again, killing sports for at least the entire year.
Is the Consumer Ready for Gambling?
As I mentioned up top, I may not be the biggest sports fan. However, I recognize that as an institution, it’s very important for the American psyche. This is especially true because of the quarantines and the resultant social isolation.
People are ready to reclaim some semblance of normalcy. For many, watching sports is a small but significant step.
However, merely enjoying sports wouldn’t be enough for PENN stock. Instead, the underlying company needs people to start gambling. But with the economy the way that it is, I’m not sure this is feasible.
While people who are fortunate enough to be working today are breathing a sigh of relief, none of us are guaranteed a paycheck. With multiple corporations suffering steep revenue declines, it’s inevitable that we’ll see job losses in the white-collar arena.
Besides, in times of turmoil, cash is king. Therefore, gambling today is much more expensive on an apples-to-apples comparison than when it was before the pandemic. Without having a reliable read on tomorrow, most people – at least most smart people – will keep their wallets closed. That Penn can find enough dunces to exploit is a gamble I’m not willing to take.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.