The halls of Wall Street reverberated with the echoes of Penn Entertainment’s NASDAQ ticker symbol: PENN. A thrill ran through eager traders and economists alike as shares for the regional casino operator leaped a solid 2.41%. Even more surprising, the trading volume was a staggering 55.7% above the daily average – a consequence of the respected David Einhorn, founder of Greenlight Capital, announcing that his venture has invested a “medium-sized” stake in the first quarter.
Einhorn penned a gleaming letter to his hedge fund’s clients, announcing the concerning fact that Greenlight had purchased its position in Penn for an average of $22.69 per share. Compare this to the stock’s closing cost of $17.84; investors withdrew their breath in consternation. Over the last quarter, the shares have taken a significant hit and decreased by 24%, while the year-to-date records show a decline of 31.44%. This makes Penn one of the most underperforming gaming equities in recent times.
Undeterred, Einhorn took the bull by the horns, arguing that the market was delivering an unjustified negative verdict on Penn’s ESPN Bet unit. He was convinced of a silver lining – potential growth in the segment. “We must keep in mind just how drastic public opinion has changed after the Barstool debacle,” Einhorn penned in his letter to clients. “There is real concern about the company’s strategy and whether the management can execute it effectively.”
In light of these challenges, Penn rolled the dice and laid the cards on the table: former Walt Disney executive Aaron LaBerge was sought and appointed as the new Chief Technology Officer (CTO). This strategic move aims to fortify the mottled interactive division, which includes the recently evolved ESPN Bet, launched just last November.
In the investing realm, perceptions of Penn shifted dramatically after the company bought a since-dissolved stake in Barstool Sports in January 2020. Investors quickly began identifying Penn as an online gaming venture, overlooking its foundational brick-and-mortar regional casinos entirely. This misplaced perspective sends distorted signals about Penn’s revenue composition – the majority of its earnings come not from online games but from land-based ones.
Einhorn, however, sees the opportunity in this misrepresentation. He firmly believes the market isn’t assigning sufficient value to Penn’s terrestrial casinos. According to him, the company’s current enterprise value barely surpasses $4.3 billion, when in reality, their tangible casinos could warrant a value between $4.3 billion and $7 billion.
With a firm belief in the real worth of Penn’s land-based casinos, Einhorn and his Greenlight Capital, alongside HG Vora, have recently acquired stakes in Penn. Last December, HG Vora laid claim to 18.5% of Penn’s outstanding shares incubating inside its portfolio. This was an evident maneuver to demand board seats and instigate a well-needed shakeup at the gaming giant.
Interestingly, Greenlight is no stranger to gaming equities. The fund’s track record includes a range of positions in companies across the gaming sector. All evidence suggests that Einhorn’s personal fondness for poker, where he won $4.35 million at the 2012 World Series of Poker, may well vest in Greenlight’s robust approach to gaming stocks and its remarkable performance in 2022.
