DKNG: DraftKings vs. Penn National Gaming: Which Stock is a Better Buy?

Draftkings, Inc. (DKNG) and Penn National Gaming, Inc. (PENN) are two major companies revolutionizing the sports betting industry. With the return of pro and college football in addition to the NBA and MLB, DKNG and PENN are capitalizing on the opportunity.

DKNG gained 23.4% in the past month, outperforming PENN’s 14.8% returns over this period. However, in terms of three-month performance, PENN is the clear winner with 137.1% returns versus DKNG’s 73.5%.

But which stock is the better buy now? Let’s find out.

Latest Movements

DKNG’s unconventional IPO garnered attention from investors from all spheres. It was acquired by Diamond Eagle Acquisition Corporation (DEACU) and SBTech under a Special Purpose Acquisition Company (SPAC) agreement. This allowed the company to bypass the costs and lengthy time frame demanded by a traditional IPO process, leading to a more efficient stock market debut on April 23rd.

The three-way merger with DEACU and SBTech has provided DKNG with the adequate capital flow as well as technical expertise to become an industry leader in sports betting.

DKNG recently announced a public offering of 32 million stocks through a syndicated deal, to raise approximately $1.67 billion. The net proceeds are going toward funding its exclusive partnership deals with various sports organizers and general corporate expenses.

DKNG has entered into exclusive multi-year deals with the Philadelphia Eagles, New York Giants, and ESPN. It also partnered with Colorado Rockies to become the franchise’s Official Daily Fantasy Operator and Official Sports Betting Operator. DKNG also opened Draftkings SportsBook at Mardi Gras Casino in Colorado.

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PENN recently launched the Barstool Sportbook app for online sports betting in multiple games, which quickly gained popularity among the masses and rose to the #1 app on the App store. Currently, only functioning in Pennsylvania, PENN is planning to expand the reach of the app across the country. It also partnered with Sportsradar to use real-time data of NFL games on its betting platforms.

PENN also raised $982.10 million through an underwritten public offering of 16.10 million shares, which was closed on September 25th.

Recent Financial Results

DKNG reported a 23.6% year-over-year increase in revenues to $70.93 million in the second quarter ended June 2020. The company ended the quarter with $1.20 billion in cash holdings and no debt.

PENN’s revenue for the second quarter ended June 2020 was $1.11 billion, indicating a year-over-year decline, due to the adverse impact of the coronavirus pandemic.

Expected Financial Performance

The market expects DKNG’s EPS to rise 32.2% next year, and at a rate of 40% per annum over the next five years. The consensus revenue estimate of $769.27 million for 2021 indicates a 46.2% improvement from the same period last year.

PENN’s EPS is expected to increase at a rate of 42.6% per annum over the next five years. The consensus EPS estimate of $1.36 for 2021 indicates a 125.5% improvement from the year-ago negative values. The market expects PENN’s revenue to rise by 35.3% next year to $4.91 billion.

Thus, PENN is in an advantageous position here.

Profitability

PENN’s trailing 12-month revenue is 11.53 times what DKNG generates. However, DKNG is more profitable with a gross margin of 56.6% compared to PENN’s 44.4%.

Also, PENN’s 1.2% return on total capital is substantially higher than DKNG’s negative ROTC.

Valuation

In terms of trailing 12-month Enterprise Value (EV)/Sales, DKNG is currently trading at 50x, 831.1% more expensive than PENN, which is currently trading at 5.37x. DKNG is also more expensive in terms of trailing 12-month Price/Sales (59.25x versus PENN’s 1.95).

DKNG’s 8.27x trailing 12-month price to book ratio is higher than PENN’s 6.26x.

Thus, PENN is the more economical choice here.

POWR Ratings

Both DKNG and PENN are rated “Buy” in our proprietary POWR Ratings system. Here’s how the four components of overall POWR Rating are graded for both the stocks:

DKNG holds a “B” for Trade Grade and Peer Grade, and “C” for Buy & Hold Grade and Industry Rank. It is currently ranked #1 out of 22 stocks in the Entertainment – Casinos/ Gambling industry.

PENN has an “A” for Trade Grade, “B” for Buy & Hold Grade and Peer Grade, and “C” for Industry Rank. It is currently ranked #2 in the same industry.

The Winner

Though DKNG has been on every investors’ radar since it’s unorthodox IPO, its share price gains are not completely backed by strong financials. PENN’s revenue and EPS growth potential are significantly higher than those of DKNG. Moreover, PENN is relatively cheaper. Hence, investors looking to benefitting from the comeback of the sports season should bet on PENN.

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DKNG shares were trading at $48.10 per share on Wednesday afternoon, down $3.08 (-6.02%). Year-to-date, DKNG has gained 349.53%, versus a 9.64% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...