“King of the beat and raise,” proclaimed Truist Securities analyst Barry Jonas when DraftKings came out with its 1Q24 numbers. Jason Robins’ company “provided a bright spot in an otherwise dim Q1 earnings season so far.” How so? It delivered positive ROI of $22.5 million, which was 3X to 4X of what Wall Street boffins were anticipating. Not even lackluster March Madness hold kept DraftKings down. The company is projecting 3% higher revenue and 9% greater cash flow for the remainder of 2024, with a potential ROI of as much as $540 million.
Without getting bogged down in analyst jargon, let’s just say that it’s costing DraftKings 40% less to acquire customers (name recognition will do that), and it expects to pick up further tailwinds this year from newly launched Vermont and North Carolina. Robins is already looking forward to 2025 and the biennial Texas Lege. Noting that Covid-19 stimulus funds are on the wane, Jonas observed that more dominoes could fall in the Lone Star State, as money tightens (and politicians have to abandon their self-reliance rhetoric). Sports betting looks like low-hanging fruit, iGaming not quite so much. Refreshingly, DraftKings isn’t interested in mergers or acquisitions (although Wall Street has been hyping a Rush Street Interactive takeover), “given a strong path for continued organic growth.” Sounds solid to us.
“The beat and raise goes on,” wrote Jefferies analyst David Katz, echoing Jonas. Following up today, he joined the chorus of “Buy” ratings on DKNG, with a price target of $54/share (Jonas’ is $55). J.P. Morgan‘s Joseph Greff anted up to $56/share but hung back at “Overweight.” Unlike the others, he observed that DraftKings expects to be revenue-positive in its two newest states by the end of the year, another encouraging sign.
Deutsche Bank‘s Carlo Santarelli remained something of a skeptic, nudging his price target to $35/share from $34 and putting out a “Hold” recommendation. (Interestingly, DKNG was trading at $43 at the time.) He opined that 1Q24 was “evidence of progress” but the longer-term picture remains in doubt. He noted that DraftKings was ceding market share in OSB but gaining it in iGaming. Looking over the legislative landscape, Santarelli seemed pessimistic about the chances for OSB or iGaming expansion. For example, “We remind investors that tribal influence is very powerful in Florida and California, and barring a significant change in the approach, we do not see these states as likely additions to the OSB landscape within an investible time horizon.” Meanwhile, Robins is angling to get into states like Texas via the lottery underbelly, mainly by purchasing lottery middleman Jackpocket, which again looks like a winning play.
Live by the hold, die by the hold. That was the fate of Penn Entertainment or, more specifically, its ESPN Bet subsidiary, which pulled down the first quarter. The problem wasn’t with retail establishments, like Penn’s M Resort, although the latter had a weak quarter. No, it was in the interactive sphere, where revenues came in 17% below what Truist Securities had modeled. The negative ROI was a nasty $196 million, whereas The Street was expecting -$174 million. Online sports handle had grown 96% from the dismal, Barstool Sports-branded days of 1Q23 but hold was a disastrous 4.5% in this past quarter. The Penn online database has grown 71% since when ESPN Bet went live but … “Average spend per user trailed mgmt’s expectations, though PENN believes the cause is lower share of wallet due to gaps in the product.” Internet casinos did very well, though, with revenue jumping 32% and 166% growth in monthly active users.
The bad interactive news spooked the market, although Barry Jonas urged an opportunistic “Buy” amidst the sell-off, his price target an affordable $23/share. (If not quite the Filene’s Basement bargain stock that Bally’s Corp. is.) He remained a believer, writing, “An ESPN Bet success (we could potentially get some indication with new functionality around football season) could drive material upside; but we think there is real unrecognized value in Interactive even outside of ESPN Bet.” Still, it’s got to be hard to spin the numbers when management is projecting losses on the order of $525 million, against net revenue of (interactive only) $1 billion. Although Penn execs think the 1Q24 will be the year’s worst, break-even is still somewhere off in the hazy yon of 2025, with profitability coming the year after that. OSB investing sure isn’t for the impatient.
Unlike DraftKings, Penn was quite specific about North Carolina, where it said ESPN Bet was achieving “mid-to-high single digit share, in-line with other state reporting.” The frequency of player deposits and withdrawals was to Penn’s liking but the size of bets, deposits and handle per user were all below Penn’s expectation. Uh-oh. If ESPN Bet face-plants in the Tarheel State, where it had an even playing field, it will be hard to spin positively. “PENN believes this will rightsize as it expands its parlay … offering between now and football season.” The company is also bracing itself for OSB in New York State, where it promises to remain disciplined in the face of a usurious tax rate.
David Katz chose to take the long view, penning that “ESPN Bet will remain a key focal point as its customer base and product continue to evolve, with the determining outcomes still quarters away.” Nearer-term, “PENN could be among the more volatile names … vs. peers, in our view.” He cautioned investors to “Hold,” with an $18/share target. About the best he could say for Penn’s operating environment was that it was “choppy.” Carlo Santarelli dropped his price target to $18 from $23/share, writing, “It was fairly sound 1Q24 result that was released prior to the open, with [terrestrial] performance largely in line, while the expected ESPN Bet-driven losses in Interactive created the headline miss. Then came the guidance, which immediately derailed shares.” What happened? Brick-and-mortar casino-revenue prognostications went up $10 million but cash flow down $25 million, as margins eroded. Worst still, interactive revenue projections fell $320 million. Cue market panic.
Concluded Santarelli, who recommended a “Hold” on the stock, “We believe valuation, at current levels is attractive, especially for investors with duration, though near term catalysts are hard to identify, and proof of concept with ESPN Bet is at least 6-9 months off.” In other words, grab on tight and hang in there. Joseph Greff stayed on the sidelines with a modestly lower price target ($18 in place of $19). He opined gloomily “we think the shares, at ~$15, possess value. However, we are hard pressed to find a near-term catalyst to move the shares higher.” Still, he found reason for optimism: “We think hiring a qualified person from Disney/ESPN to be the Interactive CTO is a positive step. We don’t know Aaron LaBerge, but we think his background is a good fit and have to think this provides for better PENN connectivity with ESPN.” Like the other analysts, he was fairly solid on Penn’s brick-and-mortar operations but obligation to take a wait-and-see attitude towards digital. You pays your money and you takes your choice.
Sadly, gambling revenues seem to be cooling in Maryland. The Free State delivered $163 million in April, a 6.5% slippage. MGM National Harbor slid 10% but was still out front with $68 million, pursued by Maryland Live‘s $61 million (-2%). The only revenue-positive casino was Hollywood Perryville, up 6% to $8 million. Ocean Downs faded 7.5% to $7 million and Horseshoe Baltimore did likewise, -11% to $15 million. Disaster appears to be shaping up for Century Casinos‘ stewardship of Rocky Gap Resort, whose takings tumbled 20.5% to $4 million.
Jottings: Casino legalization is all but dead in Alabama, which will be lucky if it even gets a lottery. That’s Alabama for you, proudly mired in the 19th century … A new ‘failsino’ (plus NBA arena) is being pitched for the site of the old Wet ‘n Wild site. The concept is so asinine that only Vital Vegas can do justice to it—and does … Try, try again: Years after Sri Lanka ran wannabe casino developers out on a rail, Melco Resorts & Entertainment is giving it another go. It’s partnering with the owners of Cinnamon Life resort to create a City of Dreams-branded casino in Colombo … It’ll be damned difficult to run a gambling ad in the backwater that is Bulgaria. The government there is banning such marketing online, on TV, in newspapers, on radio or in print. Is word of mouth still safe? … It looks like Native American tribes have tied clueless Oklahoma Gov. Kevin Stitt‘s shoelaces together again. Global Gaming Business reports that Stitt’s sports-betting plan is DOA. The two-tiered scheme would have given the tribes the lower, inferior tier (walk-up wagering), while exporting more profitable, online betting to the private sector. Oh, and somebody should tell Stitt that the crew cut went out of style 60 years ago.