DraftKings, Penn Among Discounted Gaming Stocks, Says Morningstar

DraftKings, Penn Among Discounted Gaming Stocks, Says Morningstar.

Jul 10, 2024
3 min read
The ESPN Bet logo. Operator Penn Entertainment and rival DraftKings are considered attractively...
The ESPN Bet logo. Operator Penn Entertainment and rival DraftKings are considered attractively valued gaming stocks by Morningstar.


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DraftKings, Penn Among Discounted Gaming Stocks, Says Morningstar

It has not been a good year for the broader universe of US-based gaming companies. With the exception of DraftKings, which is higher though lagging the broader market, stocks tied to casino and sportsbook operators are mostly lower on a year-to-date basis while the S&P 500 is up almost 17%.

Morningstar senior equity analyst Dan Wasiolek notes the group has been hit by headwinds including “angst over US sports and iGaming market competition and regulatory changes, as well as decelerating growth in US physical casinos after their strong demand recovery in 2021-23.” However, he added that some value is emerging among the six domestic gaming stocks covered by the research firm.

Perhaps surprisingly, Wasiolek views DraftKings (NASDAQ: DKNG) — a stock almost universally seen as richly valued — and Penn Entertainment (NASDAQ: PENN) — a potential value trap owing to its 19% 12-month slide — as among the gaming stocks that are now attractively valued. Despite the aforementioned issues, the longer ranging outlook for iGaming and online sports betting is constructive and that could be to the benefit of DraftKings, Penn, and select competitors.

A combination of new users, consumers spending more on these activities, and an increasing number of states permitting sports betting and iGaming has Wasiolek predicting strong sales growth. He anticipates industry revenue growth of 19% in 2024, 24% in 2025, 13% in 2026, and 27% in 2027,” according to Morningstar.

The research firm noted that over the past six quarters, US commercial gaming revenue has averaged growth of 9.3%, or more than quadruple the rate of GDP growth in this country.

Outlook for OSB, iGaming Growth Supports Some Gaming Stocks

Currently, some form of sports wagering is permitted in 38 states and Washington, DC. That covers about two-thirds of the US adult population. The big kahunas of California and Texas aren’t on that list, Florida doesn’t have a competitive market, and Georgia disappointed on the legislative front this year.

However, the long-term outlook is arguably bright for companies like DraftKings and ESPN Bet operator Penn because Wasiolek sees seven more states adding sports wagering by 2027, covering 90% of the US adult population. Texas could be part of that group.

“Texas is among the states with potential approval, and it represents 8%-9% of the country’s adult population, leading the industry’s revenue growth forecast to around $23 billion in 2027 from $11 billion in 2023,” added Morningstar.

Wasiolek has a similarly bullish outlook on iGaming expansion as the analyst sees the amount of states permitting that form of wagering ballooning to 10 to 15 at some next year from the current seven. States are “incentivized by the potential for incremental tax revenue from the activity,” noted Wasiolek.

If that expansion occurs, Morningstar’s revenue estimate could jump to $12 billion in 2027 from $6 billion last year.

DraftKings, Penn Could Add Sports Betting Market Share

In the domestic online sports betting space, a clear duopoly comprised of Flutter Entertainment’s (NYSE: FLUT) FanDuel and DraftKings has emerged. Wasiolek sees DraftKings adding market share and eventually stabilizing in the high 20s on a percentage basis up from the mid-20s last year. Morningstar has fair value estimate of $49 on that gaming stock, implying upside of 33.3% from today’s close.

The analyst also forecast added market share for Penn’s ESPN Bet, though not at the double-digit percentage some experts believe is necessary to move the needle. Morningstar’s fair value estimate of $22 on Penn implies upside of 10%.

“We estimate Penn’s US Sports and iGaming share to increase to 6% by 2025, versus 4% in 2023, and hold within that range through 2027, driven by its ESPNBet launch in November 2023,” concluded Wasiolek. “Penn’s capital expenditures dropped to 2.6% in the first quarter compared to 10.9% in the previous quarter, driven by the launch of ESPNBet. Sports and iGaming will account for 16% of its 2024 sales.”

The potential inclusion of Texas in the list of states permitting sports wagering could significantly boost the industry's revenue, with Morningstar predicting it to reach around $23 billion in 2027 from $11 billion in 2023.

Morningstar also anticipates a significant expansion in the number of states permitting iGaming, potentially rising to 10 to 15 by next year, which could elevate the industry's revenue estimate to $12 billion in 2027 from $6 billion last year.

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