DraftKings spins Wall Street; Penn, Golden post records

That widening chasm between DraftKings‘ revenue projections ($2 billion in 2022) and its elusive profitability may be catching up with Jason Robins‘ company. Red ink from 1Q22 was $468 million, way up from 1Q21’s $346 million. Negative ROI shot up from $139 million to $289.5 million. What’s the problem? According to Bloomberg, the company is actually growing revenue ($417 million) and player base (two million added)—but spending ever more to get them. Robins’ answer to these problems is to cite $300 million in vague synergies from buying Golden Nugget Online and to sign former ESPN doofus Mike Golic. Yeah, that’ll really move the needle.

Truist Securities analyst Barry Jonas shaved four bucks—to $18/share—off his DKNG price target “as the company inches another quarter closer to profitability, which we still see as a 2024+ event — though [California] legalization could extend that out.” Jonas’ argument boiled down to ‘it could have been worse,’ not the most reassuring message. “Results were highlighted by New Jersey (DKNG’s most mature market) turning highly profitable as mgmt believes at least ten states will turn positive in 2022 and provide significant contribution in 2023,” he wrote, adding that DraftKings got cleaned out during March Madness. By obtaining Golden Nugget Online, Robins hopes to add as much as another $150 million in revenue.

Credit Suisse‘s Ben Chaiken noted that DraftKings was battening down the hatches, with a “combination of efficiencies around customer acquisition, fixed expenses, and some transitory items [that] drove the outperformance,” with Robins’ firm bringing in $15 million more than Chaiken expected. He’s pinning his hopes on 2023, “where cost growth should slow dramatically.” DraftKings management excluded Ontario from its revenue forecasts, which should enable them to report much-better-than-projected numbers as that province goes live, a nifty bit of ledger-demain.

Robins needs some kind of miracle, faced with a 25% increase in the cost of revenue ($313.5 million) and a decline in gross profit. Sales and marketing costs escalated 40.5% year over year, administrative costs jumped 28% and technology cost 45% more, all leading to a $468 million loss. And that’s just the first quarter.

Like other analysts, Deutsche Bank‘s Carlo Santarelli took the ‘better than expected’ route, although he noted a $380 million “cash burn” with apparent concern. Upon further reflection, he wrote, “Our view remains one of caution, given our skepticism around the longer term outlook and our view that the legislative path of iCasino, which we deem to be the most important aspect of the outlook for DKNG, as it pertains to hitting longer term targeted” cash flow. Still, he said clemently, Robins “is positioned to deliver against their guided targets for 2022, which, given the performance of the shares in the YTD, may be enough to stop the bleeding in the near term.” He knocked his price target down from $19/share to $16. The stock needs all the help it can get, currently trading at $11.80.

Not in need of spin-doctoring was Penn National Gaming, which reported $51.5 million in profit on record revenues of $1.5 billion. Not all of this was same-store growth, some of it being generated by new Hollywood York and Hollywood Morgantown (pictured) in Pennsylvania. Still, as Jeffries & Co. analyst David Katz wrote, “Penn presents a range of dynamics, between the presently strong land-based business, the early-stage digital business, and the perhaps less clearly defined media opportunities. Defining the opportunity set for the latter two remains the pivotal matter for the shares.” All regions except the Northeast exceeded Wall Street projections. Most of the improvement was in provincial markets or, as Executive Vice President Todd George put it, “We’re seeing different growth patterns than what some of the industry has seen.”

The interactive segment produced negative ROI of $10 million, a number likely to worsen with a big ($12.5 million) election-year push into California. Said CEO Jay Snowden, “Following our first-quarter results, we anticipate the most significant losses will occur in the second and third quarters as we continue to ramp in our new markets and prepare our product and tech stack for the football season. The fourth quarter will likely be closer to breaking even.” About the only place Penn won’t be spending money is the Las Vegas Strip, of which Snowden professed near-total disinterest: “We’re not kicking the tires on anything right now.” (One less prospective Flamingo buyer.)

“It doesn’t sound like PENN is seeing any slowdown in the low-end consumer, rather some shifting within segments,” added Chaiken. “However, there are a few interesting items that could help change sentiment. The launch in Ontario appears successful with trends materially stronger vs. comparable introductions in the US, generating double-digit outperformance.” He suggested that Barstool Sports (which appeals mainly to 20-somethings) could be made subservient to theScore: “While Barstool might be a good channel for certain demographics, it likely does not resonate with others.”

“Momentum has continued into Q2 on both the land-based and interactive sides of the business with the [Dave] Portnoy drama seemingly subsided,” opined Jonas. He liked Penn’s early success with cashless technology and continued share buybacks. Snowden’s team “highlighted strong property-level performance with little recognized slowdown from inflation and no mention of COVID-related impacts.” Marketing costs were described as “stable” and the company “saw continued positive visitation trends in the database,” as VIP play grew 28% and core customers’ 11%. Management “highlighted a continued focus on updating properties to appeal to younger demographics (ex. Barstool-branded Sportsbooks) and reducing customer touch point frictions among all segments.”

Santarelli, however, kept his powder dry, calling management’s narrative “uncompelling” and the results merely “solid.” “Simply put, we believe the PENN story is fine fundamentally, with the [casino] assets delivering sound results and the Interactive segment continuing to roll out its strategy, albeit one that we expect will be subscale,” he explained. The stock valuation “embeds far too much value for a digital business that is subscale and poses further risks.” He also fretted about additional brick-and-mortar competition in the coming two years, as well as exposure to the vicissitudes of the U.S. economy.

All that glitters was Golden Entertainment, posting $273.5 million in revenue and a $36 million profit. The inflow of tax refugees to Las Vegas and a rise in home-equity values were credited with driving the numbers for Nevada-centric Golden. Baby Boomers are back reported CFO Charles Protell, who said, “These results reflect increased visitation to our destination properties, continued strong level of spend at our local casinos and distributive gaming locations, and our ability to maintain margins well in excess of pre-COVID periods.” Hotel occupancy averaged 70%, weak at midweek but offset by weekend business.

Low-rollers have become a low priority for Golden marketing, according to CEO Blake Sartini. “There’s significant new signups coming from new residents to the valley. That’s providing a lot of fuel for growth going forward, while we retool that low end of the marketing database.” The company also saw a significant influx of revenue from a new tavern in the northwest Vegas Valley. “And we see no signs of slowing down at any of our properties, added Protell, even Laughlin. “Our cash flow is primarily from wholly owned gaming assets in southern Nevada, which we view as the most attractive and stable gaming market in the world today.”

Golden succeeded in part by keeping corporate costs lean. Casino revenues in Nevada were up 29% to $96.5 million, while locals-casino revenue edged up 3.5% to $40 million. Maryland chipped in $18 million (+11%) and slot routes were the bedrock, gaining 9% to $119 million. Santarelli was impressed, particularly by Golden’s outperformance in cash flow ($67 million). Still, “While the results were strong, regional gaming operator beats have not fared well this earnings season, as sentiment remains muted.”

He continued, “While staffing levels are appropriate at present, costs for similar roles remain elevated … and employee churn remains high. We would not expect GDEN to add headcount until Strat midweek volumes pickup and as such, we view current labor expense run rates as largely appropriate for the foreseeable future.” He hedged his bets, saying that April was “off to a solid start” and 1Q22 was “solid” but kept a “Buy” rating on the stock.

Although MGM Resorts International is already a frontrunner for a New York City casino, CEO William Hornbuckle is sweetening the pot for the powers that be. “We had hoped to invest up to a couple of billion in the first round to put us into the table games business, to expand some of the amenities and put in a much-needed parking garage there, to put an entertainment facility there and potentially some other things,” he told investors. Capex investments will be taken into account when determining how large a license fee (starting at $500 million) an operator would be required to pay.

Hornbuckle’s plan would be a big payday for slot makers, who’d see a chance to sell new machines to MGM Empire City to replace its VLTs. Hornbuckle’s vision is essentially for a big-ass locals casino or, as he put it, “We think that will attract the kind of market that’s available to us both in the neighborhoods and the surrounding areas.” We can’t argue, having been to Manhattan more times than we can count and never, ever having gotten out to Yonkers. And did you know that Coney Island is now in the running as the final casino site? Sounds perfectly apt to us.

Jottings: John “Mattress Mack” McIngvale officially has a gambling problem. He blew $2.5 million on Kentucky Derby loser Epicenter. Long-shot bettors who put their money on 80-1 Rich Strike (aptly named) went home happy, however … Colorado lawmakers reluctantly approved a $3 million problem-gambling program but with weasel wording that requires them to reauthorize it annually. Lamented Problem Gambling Coalition of Colorado President Peggy Brown, “To me, that doesn’t feel good. It reeks of politics, reeks of control, reeks of power. And now the coalition, an all-volunteer organization, is going to have to pitch every year why we need the funding.” … Former Mashpee Wampanoag boss Cedric Cromwell has a date with the calaboose after being convicted of bribery and extortion, along with architect David DeQuattro (just for bribery). Cedric will be the second consecutive Mashpee chief thrown in the clink. The bribes were intended to juice a design contract for Cromwell’s First Light casino project. New Mashpee Wampanoag Chief Brian Weeden said, “Tribal members are disappointed in Cedric Cromwell. We place a tremendous amount of trust in our elected officials. Cedric abused that trust.” Weeden has kept First Light at arm’s length, Cromwell having tainted the plan to an almost fatal degree,