Casinos are traditionally unaffected even in a recession scenario.
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DraftKings and Penn National Gaming stocks will outperform the market by selling additional products to their existing customers, according to a new research note.
JMP analyst Jordan Bender on Tuesday initiated coverage on the gaming companies with a Market Outperform rating. He cited the market positions of DraftKings (ticker: DKNG) and Penn National Gaming (PENN) and sees an opportunity for both companies to sell from one channel to another, known as cross-selling.
DraftKings’ stock was down 2.9% to $13.20 on Tuesday whereas Penn National was up 0.8% to $32.58.
“For DKNG, iGaming is the obvious cross-sell,” said JMP’s Bender. DraftKings iGaming products like Rocket and Spanish21 are variations of real-life casino games that can be played online. Although they are geared toward a slightly different demographic, the analyst believes the company can use its growing marketplace to offer other services like to sell sports apparel and leverage its customer base.
Another reason for Bender’s rating was DraftKings’ market exposure. As North American online sports betting continues to grow and gets legalized in more states, Bender believes the company will be able to sustain its market share as one of the top-three U.S. players. Additionally, specialized products, like its partnership with micro-betting company SimpleBet, could help exceed long-term internal revenue targets, the analyst said. He forecasts it could reach $2.87 billion by 2023, more than 2% versus consensus.
Besides JMP, Jefferies analyst David Katz reinstated coverage of DraftKings (ticker: DKNG ) at a Buy just over a month ago, saying the risk/reward was highly favorable.
For Penn National, Bender likes that the company has leveraged its position between its casino database, and its acquired online assets Barstool Sports and theScore, managing to cross-sell to the different customer groups. These channels have proven to lower customer acquisition costs, he said,
Bender thinks there is an upside to Penn National’s shares even in a recessionary scenario. Casinos have traditionally been unaffected by inflation, gas prices, and downturns given the convenience of a regional casino and the entertainment it provides for a low spend, he said. Penn’s revenue only fell 3% during the financial crisis, according to Bender.
Katz agrees with Bender. Over a month ago, he wrote that he believes in “the relative benefit of regional gaming in uncertain times.”
Penn National has also managed to maintain its market share in the past year in the face of high levels of industrywide marketing and promotions. “We attribute the sticky market share to a more loyal Barstool player and casino database [and..] believe this bodes well as elevated marketing and promotion spending declines over the next year.”
Write to Karishma Vanjani at [email protected]
