Penn Entertainment (NASDAQ:PENN) has been one of the market darlings during the pandemic as investors believed the company could play a big role in online gambling after acquiring Barstool Sports. But Barstool was never a good fit for Penn Entertainment, and earlier this year the company sold Barstool back to Dave Portnoy just months after completing its $500 million acquisition.
In addition to the Barstool debacle, its 2018 acquisition of Pinnacle Entertainment left the company $2 billion in debt, just in time for the pandemic to impact its business. The upside that investors saw in Penn Entertainment a few years ago appears to have faded, but does that leave investors with the opportunity to buy the company at a discount?
From boom to bust
The graphic below shows the wild path Penn Entertainment has taken. The stock exploded, but then fell back below pre-pandemic levels. Operationally, sales have increased, but not to the same extent as Las Vegas-focused competitors, which have achieved record sales on the Las Vegas Strip.
PENN data from YCharts
The debt from the Pinnacle Entertainment acquisition isn’t debilitating, but it will become more expensive as interest rates rise and using cash (like the Barstool acquisition) seems more like a mistake in hindsight.
PENN EBITDA (TTM) data from YCharts
Keep in mind that Penn National is also a regional casino operator. The regional gaming market has held up well during the pandemic, but has not historically been a high-growth market and supply is only increasing as states add gaming to their revenue mix. Unlike Las Vegas, most of Penn Entertainment’s casinos are not destinations, and I think that limits growth. Five years from now, Penn Entertainment could do well to keep up with inflation and economic growth.
Online gambling is becoming a cost center
Penn Entertainment has not given up its role in the online gaming space either. But it is not a market leader at the moment and this has become a money loss for the company.
In the last 12 months, Penn Entertainment spent $239 million on the interactive business and recently signed a $1.5 billion deal Walt Disney becomes another cost center. It’s not clear whether this investment will ever pay off as online gambling losses mount at Penn Entertainment and competitors across the industry.
DraftKings (NASDAQ:DKNG) is instructive here as it is the largest publicly traded company focused on online gambling. Below you can see that even a large market share hasn’t translated into free cash flow for the company. 
DKNG Free Cash Flow data from YCharts
It’s entirely possible that the Disney deal will worsen online gambling losses for Penn Entertainment.
Penn Entertainment is not what it seems
You can see below that Penn Entertainment’s enterprise value-to-EBITDA multiple of 5.1 looks cheap, but the competition likes it MGM Resorts International And Caesars Entertainment are trading at similar multiples. And they have the advantage of being based in Las Vegas, which is growing, and MGM has casinos in Macau and one under construction in Japan. I think they are strategically better positioned.
PENN EV to EBITDA data from YCharts
In my opinion, Penn Entertainment will perform worse in five years than its larger competitors, which have better physical locations and greater ability to grow in online gaming. Penn National has been a hyped stock during the pandemic, but its financial results haven’t borne out that optimism.
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Travis Hoium has held positions at MGM Resorts International and Walt Disney. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool recommends the following options: long $25 January 2025 calls on Penn Entertainment and short $30 calls on January 2025 Penn Entertainment. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.