Penn beat second-quarter earnings and revenue estimates.
Dreamstime
Penn Entertainment made a deal with Walt Disney’s ESPN to gain exclusive rights to its branded sportsbook, ESPN Bet, but some Wall Street analysts have concerns about the agreement.
Disney
‘s (ticker: DIS) ESPN sold exclusive rights of the ESPN Bet trademark to the gambling and esports company for 10 years. Penn (PENN) agreed to pay ESPN $1.5 billion in cash payments over those 10 years, according to a news release Tuesday. Penn expects the deal to potentially bring in an estimated $500 million to $1 billion of annual long-term adjusted Ebitda—earnings before interest, taxes, depreciation, and amortization—in its interactive segment.
Penn Entertainment previously owned Barstool Sports, which offers online sports betting through Barstool Sportsbook. However, Penn also said Tuesday that it sold 100% of Barstool Sports back to founder Dave Portnoy.
The ESPN Bet announcement and Penn’s second-quarter earnings and revenue beat—reported on Wednesday—initially sent the stock surging. It shares rose 9.1% on Wednesday, marking the stock’s largest one-day percentage gain since June 2022, according to Dow Jones Market Data.
That rally didn’t last long. The stock dropped 4% Thursday to $26.03 after Truist Securities analyst Barry Jonas downgraded shares of Penn to Hold from Buy and cut his price target to $30 from $33. He says the market will take time to digest the new deal.
Jonas sees several risks for the gambling tie-up. For one, the deal can be terminated after year three, “if certain market share thresholds are not met.” To gain market share, Penn will be competing with other more established online sports-betting players like DraftKings (DKNG), which just posted a profitable quarter.
Jonas wasn’t the only analyst to have concerns.
Citi analyst Jason Bazinet isn’t convinced the deal will be as lucrative for Penn as the company projects. “The Street sees a relatively low likelihood (less than 20%) of PENN achieving $500 million to $1 billion of incremental Ebitda from this partnership,” he wrote Wednesday.
“In short, we think the transaction has greater benefit for Disney,” Bazinet added.
Penn pointed Barron’s to the company’s conference call from Wednesday.
“This powerful new strategic alliance with ESPN will create a best-in-class user experience and allow us to significantly expand our digital footprint and online market share, while simultaneously and efficiently growing our customer database,” Chief Executive Jay Snowden said on the call.
Some analyst see notable benefits for Penn as more states look to legalize online sports betting. Susquehanna analyst Joseph Stauff has a Buy equivalent rating on the stock with a $35 price target.
“With increased state legalization (TX and CA), this deal could give PENN potential for an outsized reach in those new states with a sports brand that matters,” he wrote Tuesday.
Roth MKM analyst Edward Engel rates Penn as a Buy with a $38 price target. He says the partnership with ESPN gives Penn “a better chance to become a more meaningful Online sports betting/iGaming player in the U.S.”
Write to Angela Palumbo at [email protected]