Penn Entertainment Analysts Say ESPN Bet Sportsbook In Early Innings: 'Building A Business Takes Time And Money'

Casino and sports betting company PENN Entertainment Inc PENN reported fourth-quarter financial results before market open Thursday.

Here's a look at what analysts are saying after the report and the future growth of ESPN Bet.

The Penn Analysts: Macquarie analyst Chad Beynon had an Outperform rating and lowered the price target from $35 to $33.

Needham analyst Bernie McTernan had a Buy rating and lowered the price target from $33 to $32.

Stifel analyst Steven M. Wieczynski had a Hold rating and lowered the price target from $27 to $23.

JMP Securities analyst Jordan Bender had a Market Perform rating and no price target on Penn.

Related Link: ESPN Bet Is Coming To New York: What Penn Entertainment Investors, Sports Bettors Should Know

Macquarie on Penn: The losses of the digital segment were greater than expected, Beynon said in a new note.

The good news for Penn in the fourth quarter was that it had more ESPN Bet downloads than expected. The bad news was that this meant higher losses than expected, the analyst noted.

"Digital trajectory is main driver of the Penn story, in our view," Beynon said.

The analyst highlighted commentary from the company on the launch of ESPN Bet in North Carolina and New York later this year, more product improvements and deeper media integration.

"Penn's Interactive losses are similar to DraftKings's largest quarterly loss of $314 million during its customer acquisition push, and better than Caesar's loss of $554 million. However, these companies are expected to produce positive EBITDA this year, highlighting the degree to which Penn is playing catch-up."

Needham on Penn: The early days of the ESPN Bet launch are showing higher investment levels than expected, McTernan said.

"Industry peers have shown deep investment curves when entering new states, followed by contribution profit," McTernan said. "The market does not appear to be providing Penn with the same leash, especially as share appears to be consolidating at the top of the market."

The analyst said data showed ESPN Bet with around a 7% handle market share, which could mean the platform is a secondary app for bettors who use other sportsbooks and a platform for more casual bettors.

"For Penn to reach their medium-term market share goals they will need to navigate the customers’ journey of increasing handle/engagement per customer."

The analyst said the integration of ESPN Bet with ESPN is "working so far" and there are more opportunities on the way. Penn is licensing the ESPN brand for its sportsbook from Walt Disney Co DIS and showed several future integrations during its presentation.

"We still see a path for Penn to create shareholder value through ESPN Bet, which we do not believe is priced into shares."

Stifel on Penn: The drop in the price of Penn shares is questioned by Wieczynski.

"ESPN Bet doubts will keep shares range-bound," Wieczynski said.

The analyst said investors don't care much about Penn's brick-and-mortar business.

"Sure, the growth there isn't anything to write home about, but you know what, those assets throw off tons and tons of cash."

The analyst said the brick-and-mortar business could be undervalued at the current trading levels.

"Our biggest fear with Penn has been unrealistic expectations with regard to their Interactive business. First it was Barstool. Now it's ESPN Bet."

The analyst said the long-term opportunity for ESPN Bet is "compelling," but the next couple of years could be painful for Penn shares.

JMP Securities on Penn: The casino segment for Penn was solid in the fourth quarter, but investors are seeing that more investment is needed for the online segment, Bender wrote in a note.

"Building a business takes time and money. The timeline for ESPN Bet spend was pulled forward," Bender said.

The analyst said growth metrics for ESPN Bet show promise and market share for the platform could stay at 7% or higher in the near-term. The decline of promotional spending was also a highlight for the investor.

"If management is projecting out assumptions (breakeven in 2025) under current market share levels and believes product evolution will drive market share gains, the bar has been set low, in our view, and estimates should bottom at these levels.

PENN Price Action: Penn shares are down 3.17% to $18.78 on Friday, after dropping 14% on Thursday. Shares have traded between $18.35 and $32.86 over the past 52 weeks and are down 41% over the last year.

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