DraftKings, Penn National Offer Big Upside Potential, Says Analyst

Posted on: June 28, 2022, 08:51h. 

Last updated on: April 20, 2023, 11:02h.

In new, sweeping coverage of gaming equities, JMP Securities analyst Jordan Bender highlights downtrodden DraftKings (NASDAQ:DKNG) and Penn National Gaming (NASDAQ:PENN) as two of the stocks offering investors significant upside potential.

Staffers at DraftKings headquarters. JMP analyst Jordan Bender is bullish on the stock. (Image: CNBC)

Bender’s calls on DraftKings and Penn arrive with gaming stocks out of favor and with both names struggling mightily. Shares of the daily fantasy sports (DFS) giant and online sportsbook operator are off 50.49% year-to-date while Penn is lower by nearly 38%.

Specific to DraftKings, the investment community is tiring of high customer acquisition costs and a lengthening road to profitability. But Bender is optimistic better days are ahead for the stock.

Management has proven its ability to gain market access in legal states, with industry-leading U.S. population exposure,” writes the analyst. “As a result, we see DKNG growing revenue at a 19% CAGR through 2030. While we are in early innings of the online gaming sector, we think DKNG can maintain top share in NA online gaming, driven through cross-sell and its superior technology capabilities in SBTech, leading to profitable growth.”

Bender rates DraftKings “outperform,” and places a $25 price target on it, implying upside of about 80% from the June 27 close. That target is a mix of a 4x 2025 to 2027 sales estimates and 12x the 2027 earnings before interest, taxes, depreciation and amortization (EBITDA) forecast.

Inflation Not Yet Gripping Penn

As the largest regional casino operator, Penn National is seen as vulnerable to macroeconomic headwinds, of which there are plenty to go around in the current environment.

A sagging stock market, rising interest rates and inflation that shows no sign of cooling over the near-term are among the factors analysts and economists see weighing on consumer confidence and spending. That’s potentially ominous for casino operators, which are the epitomes of consumer cyclical names. However, Bender believes recent selling pressure in Penn is pricing in a depression-like scenario that’s unlikely to materialize.

“As shares are trading around $30, we believe the market is now reflecting a scenario where EBITDAR will decline 20-25% from 2023 consensus estimates for Penn’s regional casinos. This would imply higher negative flow-through vs. the Great Financial Crisis,” notes the JMP analyst.

Bender adds that nothing in his channel checks currently suggests that Penn is being hampered by the aforementioned macroeconomic challenges.

He rates Penn “outperform” with a $52 price target, of which $44 is derived from the operator’s land-based business and $8 comes from its online unit, including theScore and Barstool Sportsbook.

Other New Coverage

Bender also initiated coverage of FanDuel parent Flutter Entertainment (OTC:PDYPY), Golden Entertainment (NASDAQ:GDEN), MGM Resorts International (NYSE:MGM), and Rush Street Interactive (NYSE:RSI) with “outperform” ratings.

The analyst has a $55 price forecast on MGM, noting the BetMGM alone could be worth $18 a share.

He also started coverage of Bally’s (NYSE:BALY) with a more tepid “market perform” an no price projection.