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This month, Cathie Wood’s Ark Invest made the news by opening a position on the online gaming platform DraftKings (NASDAQ: PENN). Nationally, online gambling is growing at a rate of 13.2% per year, and with more states (including New York) looking into legalization, there are good reasons to be expect segment growth to continue.
Despite Ark Invest’s optimism, I don’t think DraftKings is the best way to invest in this promising space. Penn National Gaming (NASDAQ: PENN) is a better game.
Image source: Getty Images.
A perfect playing partner
In 2020, regional casino company Penn National Gaming purchased a 36% stake in Barstool Sports for $ 450 million. Under the terms of the deal, he has options to increase his stake to 50% in the coming years, and according to CEO Jay Snowden, he will exercise them.
So what does Barstool Sports bring to the table as a partner?
With 66 million monthly active users 12 months ago, the sports media brand is really attracting an army of people. What’s more promising is that 62% of these users also play sports, and 44% do so every week. For context, Barstool is attracting more players to its content each month than the NFL estimated it would attract throughout the entire 2020 season, and CraftKings just doesn’t have a built-in fan base of this size to tap into.
The type of fan the bar stool attracts is also younger and more likely to be male than the traditional Penn National demographic. Given that sports betting is primarily aimed at young men, this is not surprising, but for the casino operator it was also a much-needed change.
Barstool’s well-established customer base will allow Penn to spend virtually nothing on external marketing. In contrast, DraftKings spent around $ 203 million in its most recent quarter just to maintain brand awareness and market share. And despite the large gap in marketing spend, Barstool Sportsbook broke DraftKings’ record for opening weekend downloads when it debuted in Pennsylvania late last year – and the market share of its product continues to grow.
DraftKings has a market share in Pennsylvania relative to Barstool, but its product had been available for several months, its lead is shrinking and Barstool Sportsbook is already leading the way in terms of revenue.
Barstool’s product debuted last month in Michigan with an even warmer reception, with 68% more deposits for the first time than when it debuted in Pennsylvania. Its combination of popularity and low spending model is ideal in a sports gambling industry where margins are somewhat low. The bookmaker is expected to open in eight other states in 2021.
Regardless of how much help Barstool may provide, Penn will still need to invest in building its gaming products nationwide. Considering this, it is encouraging to see that this company’s physical casinos have returned to high profitability so quickly. These will provide a consistent source of funds to fuel the company’s expansion, while DraftKings remains fully entrenched in the cash-consuming mode.
The bar stool helps everywhere
Barstool Sports offers more to Penn National’s business than the new digital bookie. The sports media conglomerate also owns two of the top 20 podcasts in the country and set profitability records in 2020 through those assets as well as advertising and merchandise sales. And the company did so despite the long hiatus from live sports last year.
Additionally, Penn is actively transforming its portfolio of casino properties into the Barstool’s brand in order to make the most of the name’s influence. To get an idea of the impact this will have, look no further than the company’s location east of Chicago. In the days following Barstool’s rebranding, casino sports betting increased 35%, table volumes increased 27%, and slots volumes increased 26%, all week. All Penn has to do is combine his strengths with Barstool and let the magic work. The acquisition even bolsters Penn’s legacy loyalty program, with 15% of its Michigan players already enrolled.
Finally, in the coming months, the duo plan to open up standalone entertainment destinations in urban centers to build on their omnichannel approach. DraftKings might be able to build a successful sports gambling business, but Penn does it while building much, much more.
Penn is about to dominate
That’s not to say DraftKings is a bad investment idea. Cathie Wood is brilliant and DraftKings could certainly find significant success.
Yet, in my opinion, Penn’s acquisition of Barstool Sports will remain one of the best M&A decisions of my life. (And I’m in my twenties.) The bar stool has everything Penn needs to be successful and more. As a shareholder, I’m excited to see this company grow over the long term and think you should consider adding it to your portfolio as well, even following recent stock gains.
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