Penn Entertainment Analysts On 'Landscape-Changing' Sports Betting Deal With ESPN: 'This Move Makes Sense'

PENN Entertainment PENN stock jumped after the market close Tuesday after the company unveiled a partnership with sports media company ESPN, second-quarter earnings and the divestiture of Barstool Sports.

Here’s a look at what analysts are saying about Penn and its competitors in the wake of a monumental shift in the sports betting sector. 

The Penn Analysts: Needham analyst Bernie McTernan has a Buy rating on Penn Entertainment and $44 price target. 

JMP Securities analyst Jordan Bender has a Market Perform rating on Penn Entertainment. 

Susquehanna analyst Joseph Stauff has a Positive rating on Penn Entertainment. 

Related Link: Dave Portnoy Not Confident Of Future With Barstool Sports (From May 2023) 

Success Is Not Guaranteed, Needham Says: In an appropriately named note titled “Emergency Press Conference,” Needham's McTernan dived into Penn's market share potential. 

“Our key focus is on market share including strategy and spending plans to convert ESPN app users and viewers,” the analyst said. 

Penn is in a better position after previously working with Barstool Sports, but the  future success of The Walt Disney Company DIS unit is not guaranteed due to recent “failed OSB-media partnerships,” he said. 

McTernan said many questions remain, including Penn's customer acquisition and its marketing spending with the ESPN partnership.

The analyst said the partnership between Penn and ESPN comes after DraftKings Inc DKNG said that new customers in old legalized states are still up for grabs.

The partnership could lead to more consolidation in the sports betting industry, as well as lead to greater adoption of online sports betting, increasing the total addressable market size, McTernan said. 

Penn Analyst Says Deal Neutral For Stock: JMP's Bender said the partnership between Penn and ESPN is a “landscape-changing deal.” 

The parntership "will give PENN the top sports media brand, with a more core sports-betting demographic to feed into its customer acquisition funnel,” the analyst said.

Penn is paying $1.5 billion over 10 years, $500 million in warrants and additional warrants based on market share targets.

It could take years to see if estimates from the deal are reached, including Penn’s goal of $500 million in EBITDA, he said. 

“Will it work? Time will tell, but to this point, media cross-sell in the United States has not worked, including PENN/Barstool.”

PointsBet sold its U.S. sports betting business after gaining minimal traction despite a partnership with Comcast Corporation CMCSA unit NBC, which has a reach of 96 million adults, Bender said. 

“Recent share gains within the industry have been product driven, and we believe Penn will need to prove to investors its product is on par with industry leaders to hit its targets. Our initial reaction is the ESPN deal is neutral for shares (Barstool divestiture positive).”

'This Move Makes Sense': Susquehanna's Stauff said Penn Entertainment could gain a larger customer acquisition network with its ESPN partnership. 

Penn needed a larger customer acquisition funnel given the dominance of FanDuel and DraftKings, which control around 76% market share of the online sports betting sector, the analyst said. 

“With increased state legalization (TX and CA), this deal could give PENN potential for an outsized reach in those new states with a sports brand that matters,” he said. 

Penn has 2% market share for online sports betting in the second quarter, Stauff said. Other players like BetMGM and Caesars Entertainment CZR have 8% and 5% market share, respectively.

“This move makes sense.”

The Impact On DraftKings: Oppenheimer analyst Jed Kelly shared a take on how the deal impacts DraftKings, which saw shares trade down Tuesday night after the partnership was announced.

“We see a minimal competitive impact to DKNG based on having a better combination of product, OSB brand, and most importantly, much higher CAC efficiencies,” Kelly said.

Kelly, who has an Outperform rating on DraftKings and a price target of $40, said DraftKings’ previous deal with ESPN saw minimal return on investment.

“PENN is renting another brand albeit with much higher distribution and tier 1 sports content, but still responsible for its customer acquisition, where the company struggled to gain traction with Barstool, achieving sub-5% share, despite the brand’s high affinity with males ages 18-40.”

What Others are Saying: CNBC host Jim Cramer praised the deal and the impact the $1.5 billion could have for Disney.

“This deal is huge and I think the beginning of a revenue stream that can make Disney stock a bargain,” Cramer said. “At this point I say you bet against Disney and send me an invitation to your funeral.”

Sports betting reporter Darren Rovell asked his 1.9 million followers on Twitter about the impact of ESPN getting into betting.

“Do you think you will be more likely to use ESPN Bet because of graphics on live games on ESPN and because of marketing ties to analysts?” Rovell asked.

The results were:

Absolutely: 13%

Maybe: 26%

Definitely Not: 62%

Rovell highlighted several comments from Penn CEO Jay Snowden from Wednesday morning’s earnings call. Snowden said Penn is not doing the partnership to be a 4% or 5% market share player, suggesting the company has grand ambitions for the deal.

Snowden also said the average age in the Barstool database is 29, and ESPN has a more scaled audience.

“Translation: Barstool demo can’t afford to lose the same amount of money as general population,” Rovell tweeted.

PENN Price Action: Shares of PENN Entertainment are up 8.09% to $26.85 on Wednesday versus a 52-week trading range of $22.96 to $39.35. 

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