Sin stocks – mainly alcohol, tobacco, and gambling – may carry a bad reputation, but they are big business and can bring solid returns to investors. And, in an important piece of news that happened last week, the State of New York has officially legalized online sports betting. The gaming outline was included in the state’s regular budget proposal, as the legislature saw legalized sports betting as a vehicle for increased tax revenue. Governor Cuomo signed the bill.
Included in New York’s outline for bringing online sports betting into play are provisions for platform providers to bid on acquiring the two available legal applications. The selected providers will pay a one-time fee to the state of $25 million each, and their operations will be subject to a minimum tax rate of 13%. Terms of the bill will allow betting on both professional and college sports, as long as no New York college is involved in the actual sporting event.
New York’s bill is an important step in an overall trend toward more legalized gambling in the US. More than two dozen states now have legal sports betting – although in many, bets have to be placed in person. Moving the service online, as New York is doing, is the next step, and has been taken by 14 states.
The trend makes online betting providers a natural target for investors interested in legal gaming, and the companies that offer it. Using the TipRanks platform, we’ve looked up three such stocks for which some Street analysts are projecting strong growth over the next 12 months. Here are the details.
Penn National Gaming (PENN)
The first gaming stock we’re looking at, Penn National, got its start in the horse racing business in the 1960s, and has since expanded to become a major gaming operator in 19 states, where it controls 41 gaming and racing properties. Penn also owns slot machine video gaming terminals, and offers live sports betting in Colorado, Illinois, Indiana, Iowa, Michigan, Mississippi, Pennsylvania, and West Virginia. Penn has 36% ownership stake in Barstool Sports, and uses that company’s media to leverage its own interactive betting products. Penn’s network, which includes 48,000 gaming machines, 1,300 table games, and 8,800 hotel rooms, taps into a casino audience of 20 million customers, along with Barstool’s online audience of 66 million customers.
So Penn has scale going for it, in a big way. That has helped the company to weather the pandemic storm in 2020, even though COVID-related closures had a heavy impact on revenues and earnings. For 4Q20, the company reported over $1.03 billion at the top line, down 23% year-over-year, along with an EPS of 7 cents per share. While revenues were down, the EPS compared well with the prior year’s 80-cent loss. Subsequently, the stock has surged ~400% over the past 12 months.
Penn is working to expand its online presence, and in February of this year entered into a partnership with Capital Region Gaming, a 20-year agreement that now gives Penn access to New York’s online casino and sports betting market. The move was speculative on Penn’s part, but has now been justified by the new legislation cited above.
In addition to entering New York’s market, during March Penn launched its Barstool Sportsbook mobile app in Illinois. The app will be available for both Android and iOS users, via smart devices and desktop computers. Also in March, Penn received the first regulatory approval, a temporary permit from the Virginia Lottery, toward making the Barstool app available in that state.
Covering Penn for Rosenblatt Securities, 5-star analyst Bernie McTernan writes: “ Similar to our industry view, PENN is bullish on the potential for supportive legislation this year, noting a 40% market access target is reasonable for YE’21, although there is still a high level of uncertainty. Given their regional footprint and relative market share in OSB, PENN is confident in their ability to gain entry into all new markets. For states with existing legislation, their regional footprint and Barstool’s popularity in the state will be the determining factors for timing; we expect PENN to target launching in IL, IN, NJ and CO with launches in all states with existing legislation by the NFL season.”
McTernan’s comments back up his Buy rating on PENN, along with his $140 price target that suggests a 62% upside for the coming year. (To watch McTernan’s track record, click here)
Overall, PENN has attracted notice from Wall Street’s analysts, who have set 9 Buy ratings on the stock recently. These are partly balanced by 1 Hold and 1 Sell, making the analyst consensus rating a Moderate Buy. The stock has an average price target of $125.27, which implies ~40% upside from the current trading price of $92.85. (See PENN stock analysis on TipRanks)
DraftKings, Inc. (DKNG)
Next up is DraftKings, a major player in the world of sports betting and online fantasy sports leagues. The company has an online model that served it well during the corona crisis, and DraftKings stock is up a 208% over the past 12 months.
DraftKings was the first legal mobile sports betting outfit in New Jersey, starting there in 2018, and has since expanded its geographic reach and its game offers. The company allows app users to place bets on sports games, indulge in fantasy leagues, and play more traditional online casino games.
In its most recently quarterly report, for 4Q20, DraftKings showed a key datapoint that gives a solid reason for success: the company reported 1.5 million monthly unique players in Q4, up from just over 1 million in Q3. Average revenue per monthly unique players was $65, and total quarterly revenue was $322 million. That total was 38% higher than had been expected. Rising user numbers and revenues prompted the company to increase its top-line guidance for 2021, boosting it from the $750 million to $850 million range to $900 million to $1 billion, or up 18% at the midpoint.
In mid-April, DraftKings became an official sports betting partner of the National Football League, and the NFL’s official daily fantasy partner. The partnership cements DraftKings’ position as the leader in online fantasy sports leagues, and gives DraftKings rights to integrate its sports betting content directly into official NFL media.
According to Oppenheimer analyst Jed Kelly, “DKNG can enhance its fan experience with NFL highlights, footage, and next Gen Stats.”
Kelly lays out a clear bullish case for DKNG, noting: “The company is driving strong engagement (87%/108% customer/revenue retention in Year-2) and we see the SBTech migration (DraftKings will switch to using SBTech for its platform in September) providing improved product capabilities, such as same-game parlays, that close the competitive gap with other large operators. Additionally, DKNG’s updated state-level unit economics outlook implies ~800bps of gross margin efficiencies on the in-house tech platform migration and other efficiencies at scale.”
To this end, Kelly rates DraftKings shares an Outperform (i.e. Buy), and his $80 price target implies a one-year upside of 34%. (To watch Kelly’s track record, click here)
Overall, DraftKings gets a Moderate Buy rating from the analyst consensus, based on 20 reviews that include 14 Buys and 6 Holds. The shares are selling for $59.69, and their $74.16 average price target suggests an upside potential of ~24% in the next 12 months. (See DKNG stock analysis on TipRanks)
fuboTV got its start in 2015 as a soccer streaming service – but it has since expanded and now is a sports-centric online streaming television provider, offering audiences access to all broadcasts from the major American leagues: NFL, MLB, NBA, NHL, and MLS. The service also streams international soccer along with news and network programming.
Online streaming is a rapidly growing sector, and fuboTV finished 2020 with strong metrics. The company had 548,000 paid subscribers as of December 31, who had streamed a total of 545 million hours of programming during the year. Revenue for the year totaled $269 million, and in the fourth quarter, the company added over 92,000 subscribers and exceeded $105 million in quarterly revenue.
In early March, fuboTV announced that it had secured deals in three states to launch its fubo Sportsbook, an online sports betting service. The company has access in Iowa through Casino Queen, and has now gained access to the New Jersey and Indiana market through an agreement with Caesars Entertainment. fuboTV expects to launch the Sportsbook service in 4Q21, pending regulatory approval.
Barrington analyst James Goss has taken a deep look at FUBO, and he sees plenty of reasons for optimism in the company’s outlook.
“Sports betting is an area of focus for management in developing a sportsbook to drive engagement and retention, while creating the opportunity for additional revenues,” Goss wrote.
The analyst added, “Development of profitability and cash flow targets will take time, with progress toward achieving internal targets partly reflecting the balance management attempts to strike between growth and investment. The move into sports gambling may well be the biggest wild card in this regard, while potentially offering the greatest incremental return.”
Goss rates FUBO an Outperform (i.e. Buy), while setting a $40 target on the stock. The figure implies ~84% upside potential for 2021. (To watch Goss’s track record, click here)
How does Goss’ bullish bet weigh in against the Street? Overall, Wall Street likes FUBO, a fact clear from the 7 analyst reviews on record. 6 of those are Buys, against just 1 Hold. The stock’s trading price is $21.78, and the average price target of $45.43 is even more bullish than Goss’s; it suggests room for ~120% growth this year. (See FUBO stock analysis on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.