Barstool Sports Parent Shares Dip Over Revenue, ‘Talent’ Concerns

Casino and sport wagering firm Penn National Gaming saw it shares fall nearly 14% Thursday before rebounding somewhat Friday as investors were spooked by a combination of a mediocre outlook, an underwhelming first quarter and more unwanted attention drawn by the media bros at Barstool Sports.

Penn dropped nearly $800 million from its market capitalization in high-volume trading and saw only a slight bounce-back in early Friday trading. Before the market opened Thursday, Penn posted higher revenue and much higher net income in its first quarter, but those numbers hid spotty results that disappointed investors.

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The quarterly numbers couldn’t patch over negative perceptions around how Barstool could affect Penn’s gambling franchises going forward. Earlier this week, Barstool fired an on-air personality for rapping a racial slur. In November of 2021, Penn shares lost more than 20% after a report of Barstool’s Dave Portnoy having sexual encounters that some termed abusive.

“Some of the Barstool stuff does matter from a market sentiment standpoint: The bear case is there could be something that impacts Penn’s licenses because of actions by someone at Barstool,” said Needham & Co. senior analyst Bernie McTernan on a phone call. “They just closed the [Barstool] transaction, and this is the first earnings call after it—the timing was pretty horrible from a stock perspective and investor perspective. And that’s not saying the action itself wasn’t.”

While it may seem an over-reaction to sell off Penn shares on the actions of Barstool personalities, “Don’t forget, these operators have to apply to get licenses and are very regulated,” added McTernan. “It’s the market putting a non-zero chance on the likelihood licenses could get taken away at some point because of the actions of someone at Barstool. … It’s bringing up this existential threat.”

Penn operates 32 sportsbooks and a couple of dozen physical casinos.

Even while Barstool helps Penn get attention it does want—Barstool head Erika Nardini pointed out on Thursday’s earnings call that Barstool did a record 19 billion cross-platform video views in the first quarter—the company acknowledged they are walking a line while offering their 100 contributors freedom.

“Part of what makes Barstool Sports interesting is that we are not particularly corporate in how we think about the culture of our content,” Nardini said. “Now there are certain lines you don’t cross. There’s guardrails that exist. Those have obviously increased now that we’re in a highly regulated category.”

Part of the sell-off on Penn, too, is that while Barstool is generating a lot of views and attention, Penn isn’t doing a great job yet of converting that into money. In one example, Penn said it decided not to actively pursue customers in Barstool’s home state of Massachusetts (it opened to sports betting earlier this year) because of the high cost of incentives to gain customers. By contrast, Boston-based DraftKings leaned into its Bay State origins in marketing, a factor it said in a Friday call on its earnings helped it command excellent market share. Penn did note that it expects business to perk up as football season approaches and said Barstool’s advertising revenue typically strengthens over the course of the calendar year.

The first quarter results were disappointing with a 24% drop in earnings before interest, taxes, depreciation and amortization—EBITDA, a closely watched measure of business health—even though Penn showed better top line revenue, of $1.67 billion, with net income of $514 million. Net income was up nearly 900% compared to the first quarter of 2022, which normally would excite investors, but the improved income was essentially all from accounting gains related to spinning its casino properties into a real estate investment trust division as well a paper gain on the value of Penn’s original Barstool shares driven by Penn buying the rest of the company.

One bright spot for Penn was its Ontario operation, which it established two years ago with the purchase of The Score for $2 billion. Customer retention is much better in the region than in the U.S., and executives are excited to deploy the systems they use in Canada to the U.S. later this year.

“They see this great product that they’re creating in Ontario, and they’re chomping at the bit to roll it out in the U.S. come July,” said McTernan. “So they’re just in this holding pattern right now where they’re waiting to bring the product to the U.S. ahead of the football season. They don’t want to go out and acquire customers now to have a bad experience.”

(This story was updated in the first paragraph to include Friday’s stock results.)

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