Penn National (NASDAQ:PENN), as expected, reported a first-quarter loss before the market opened Thursday. Yet PENN stock jumped 15.39% on above-average volume, extending a run that has the name higher by almost 65% over the past month.
The company posted a first-quarter loss of $608.6 million on revenue of $1.12 billion, the latter of which was down $166.5 million year-over-year. Penn operates 41 gaming venues in 19 states, all of which were closed because of the novel coronavirus pandemic, so it’s understandable that its results for the the first three months of the year would take a hit.
Yet, here we are in early May and all U.S. casinos were shuttered for the entirety of April. At best, if gaming companies get lucky, they may be able to get seven to 10 days worth of revenue out of May. That’s one way of saying that for as bad as Penn’s first-quarter results were, it wouldn’t be surprising if its April through June results are even worse.
That would make sense for a couple of obvious reasons. First, Penn has no exposure to Macau and analysts almost universally agree that the Chinese territory will be the first gambling hub to rebound. Second, with operations in such a broad group of states, the company is at the mercy of a broad array of reopening protocols. The reality is, 19 states aren’t going to simultaneously flip a switch and say “Let’s reopen casinos.”
Those reasons and others are prompting some doubt regarding the Penn stock recovery, but that could be the wrong way to approach the stock.
Penn Is Changing For the Better
Operating 41 brick-and-mortar casinos implies that traditional gaming will continue being the primary contributor to Penn’s top and bottom lines, but that doesn’t mean the company can’t source new avenues of growth. In fact, it’s doing just that. Commentary to that effect explains why the stock surged on Thursday and why it’s soaring over the past month.
These days, growth in the gambling business means online gambling and sports betting, two venues where Penn is poised to shine. Yes, Covid-19 is decimating the casino business, but it’s also highlighting the importance of companies’ dwelling in the iGaming space.
After making comments to this effect last month – contributing to the stock’s recent run – Penn CEO Jay Snowden reiterated Thursday that its online casino business, particularly in its home market of Pennsylvania, is thriving. That’s important because as a result of the coronavirus crisis crippling states’ revenue, more states are expected to mull permitting online casinos and sports betting to bolster coffers.
Speaking of sports betting, of the 19 states in which Penn has a casino, 10 offer operational sports wagering. That, coupled with growth in the higher margin online sports betting industry, are viewed as drivers of further upside for the stock.
“The company continues to expect to be a leading force in the emerging US sports betting business, noting it believes it can be a top-three share player and achieve the highest margins in any market it enters,” said Stifel analyst Steven Wieczynski in a note out Thursday.
He has a “buy” rating and $37 price target on Penn stock. That’s more than double where the stock closed at on Thursday.
Bottom Line: Don’t Forget About Barstool
Much of the recent rosiness ascribed to Penn stems from the company’s relationship with Barstool Sports. Penn paid $163 million for a 36 percent slice of sports blog earlier this year and can eventually own the platform outright for $450 million.
The gaming company confirmed that the highly-anticipated Barstool app will debut in the third quarter, giving the operator more exposure to the coveted millennial and Gen Z demographics.
“The Barstool brand, loyal audience and marketing engine will help drive meaningful market share as the product is introduced across our database of 20 million casino customers and Barstool’s audience of over 66 million fans,” said Snowden.
Bottom line: investors aren’t wrong to fret about when Penn’s land-based casinos will reopen and how long it will take for that business to get back to normal. However, the prescient realize this is now an iGaming/sports betting stock and that increases the allure of the Penn thesis.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
