The world of sports wagering is an enticing one, even more so when associated with a giant like ESPN. The mobile application ESPN Bet, launched last November under parent company Penn Entertainment (NASDAQ: PENN), appeared to be a promising project. Nevertheless, it now seems destined to post a significant first-quarter shortfall — a development predicted to cast a shadow over Penn shares.
The spotlight first shone on potential losses at the betting app in a comprehensive report issued this Monday. Respected Deutsche Bank analyst Carlo Santarelli did a deep dive into the numbers, resulting in an unsettling prediction. Santarelli scaled back his price target for Penn stock from $22 to a more modest $19. Still rated “neutral”, the adjusted forecast now veers from the Wall Street consensus price outlook of $26.51, settling at 14.8% above today’s closing price.
Santarelli was immediately seen to ponder the dicey nature of the situation. “The continued underperformance of the shares has triggered our curiosity,” he wrote, “We remain cautious on ESPN BET’s performance, which will likely be the stock’s main influence in the near future.”
Turning an analytical eye to the specifics, Santarelli pointed towards a shaky sports wagering hold as the main culprit. He anticipates Penn’s digital division to post a considerable loss – an overwhelming $187 million – far eclipsing his earlier estimate of $167 million. Penn, a regional casino operator headquartered in Pennsylvania, is slated to present its results for the January-March quarter on Thursday, May 2. Industry experts predict a quarterly loss of 58 cents a share on revenue of $1.66 billion for Penn. The past 90 days have seen a consistent trend, with nine analysts scaling back earnings per share (EPS) estimates for the gaming firm, while none ventured to raise related forecasts.
Despite Penn’s primary focus on operating regional casinos, the substantial cost expended on securing the ESPN brand from Walt Disney (NYSE: DIS) has resulted in an intense spotlight on the sports betting aspect of the operation. This increased scrutiny, coupled with the expectation of ESPN Bet operating at a loss for a significant duration of 2024, explains the recent 17.75% stock decline over the past month, doubling from the beginning of the year.
In the report, Santarelli pinpointed the parlay bets as a weak link in ESPN Bet’s early days. He hinted at the potential for improvement in future, though the degree of patience Penn could expect from investors was less certain. Competitors like DraftKings (NASDAQ: DKNG) and Flutter Entertainment’s (NYSE: FLUT) FanDuel were on record as adept at managing parlay bets, increasing the pressure to iron out operational kinks.
On the bright side, regional revenue for Penn showed signs of rebounding after a challenging January marked by adverse weather across the US. Santarelli noted steady revenue streams in February and March, which somewhat countered initial losses. Particularly, Penn’s Midwestern venues stood firm against problems faced by some of the company’s southern casino hotels.
Santarelli concluded with a positive outlook for Penn, identifying the M Resort in Henderson, Nevada, the Hollywood Columbus, and two Penn casinos in Illinois as potential beneficiaries of the company’s scheduled upgrades through 2025.
