PENN Entertainment (NASDAQ:PENN) shot up in early trading Monday after Bank of America upgraded the casino stock to a Buy rating from Neutral. Analyst Shaun Kelley pointed to a strong start for ESPN Bet in the U.S. and stable regional gaming trends.
"ESPN Bet is dominating initial download activity and charts, proving it is cutting through to customers. ESPN Bet has been #1 or #2 of all free apps on the iOS store since last Tuesday, with 865K cumulative downloads and a 4.8 app store rating, even without data from NFL Sunday."
Kelley said that while skepticism ahead of the launch centered on ESPN's support of the launch vs. comarketing deals with DraftKings (DKNG) and Caesars Entertainment (CZR), the firm sees encouraging signs with full-screen takeovers on the app/web and early content mentions. The firm estimates 6% to 7% online sports betting share with PENN’s initial spending noted to be commensurate with up to ~10% share. Keely calculated that every 1% market share is worth ~$2 per share to PENN’s stock.
BofA boosted its price objective on PENN to $30 from $27, based on a $20 to $25 base business and $8 per share for ESPN Bet optionality, which was noted to be on the conservative side of the $7 to $15 per share potential range. The $30 PO works out to approximately 6.5X the estimated 2024 land-based EBITDAR for PENN plus $8 for the sports betting business.
What is good for PENN can also be good for Disney (DIS) as the ESPN Bet deal included $500M in PENN warrants that will be more valuable if the underlying stock rallies.