Penn National Gaming (NASDAQ:PENN) has been one of the most exhilarating stories in the gaming sector this year. PENN stock has subjected investors holding the shares since the start of 2020 to a wild ride.
Like other casino equities, Penn rallied in January and February. Then the novel-coronavirus pandemic hit, turning what was almost a $40 name in early March into a sub-$4 stock in a matter of weeks. There was a point in March when analysts pondered whether plenty of gaming operators would survive. They frequently identified Penn as one name in the sector that would knock on death’s door if the zero-revenue environment lingered for too long.
That was then, but everything has changed since. PENN stock has soared a staggering 1,410% off its March lows. Recently, the shares have established a steady string of new all-time highs.
Based on the old saying about stocks not moving up in a straight line, it would be prudent to exercise caution with Penn over the near-term. After all, the stock is up 69% in the last month.
However, after the shares nearly reached $57 on Aug. 20, they can still climb further. Barry Jonas, an analyst at research firm Truist, has a $62 price target on the shares. Moreover, analysts’ average price target on the stock is around $47, so other analysts who cover the name could raise their price targets soon.
Why Bet on PENN Stock
In simple terms, investors who buy the shares are betting that the recovery of brick-and-mortar casinos and the growth of internet-casino games and online-sports betting will meet or exceed average expectations.
Penn operates 41 casinos in 19 states. Fortunately, just three of those venues are in Nevada and just two are in Las Vegas, Casinos in that region have, on average, been hit harder by the pandemic than those in other locations.
And the operator has already sold the land on which the Tropicana sits, indicating that Las Vegas’ Strip isn’t a high priority for it. When it comes to casino stocks, investors should only buy the shares of companies that either own many venues outside of the U.S. or operate many casinos in the U.S. outside of Las Vegas.
Penn meets the latter criteria. Amid uncertainty as to when a Covid-19 vaccine will be available and airlines will restore routes, Las Vegas is in a rough spot for the time being. However, that doesn’t mean folks aren’t gambling. Companies that operate many casinos in the U.S. outside of Las Vegas, including Penn, say those venues have been performing well in recent months. In other words, if gamblers can drive to casinos, they’ll go to them.But most people won’t visit casinos if they have to fly to do so.
The next part of the bull thesis on PENN stock is online casinos and sports betting. Those two categories are often lumped together simply because companies are typically entering both of them simultaneously. Via its Penn Interactive Ventures (PIV) unit, Penn is levered to both. But its sports-wagering business is garnering more headlines because of Penn’s relationship with Barstool Sports.
It can be argued that Barstool’s culture is risky in today’s world of political correctness gone wild. The brash, devil-may-care, boys-will be-boys attitude of Barstool founder Dave Portnoy runs counter to the values that one segment of the population is trying to foist upon others. That would appear to be negative for Penn because, although the company controls just 36% of Barstool for now, Portnoy is very much the face of Penn.
On Aug. 19, Penn stock slumped on rumors that Portnoy might have Covid-19. Penn resumed its rally the following day after reports stated that Portnoy was feeling better.
Drilling Down
The pandemic is reducing states’ revenue, meaning more of them will consider legalizing online casinos, sports betting or both in order to make more money.
Meanwhile, some of the more upbeat assumptions on internet casinos and sports betting in the U.S. call for revenue of up to $9.5 billion and $25 billion, respectively, by 2025. In the U.S., approximately 63% of the online-sports-betting markets is controlled by DraftKings (NASDAQ:DKNG) and FanDuel. Only one other company has market share of close to 10%.
The companies that are looking to compete with DraftKings and FanDuel in sports betting appear to have a daunting climb. But thanks to Barstool, Penn has the brand recognition to steal customers from DraftKings and FanDuel.
That thesis will be tested soon, as Penn plans to roll out the Barstool sports-betting app in time for the NFL season. If that launch goes well and online casinos and sports wagering materially contributes to Penn’s 2021 revenue, in-line with Penn’s previous forecasts, it’s not out of the realm of possibility that the shares will reach $80+ in 2022.
Todd Shriber has been an InvestorPlace contributor since 2014. He owns shares of PENN and DKNG.
