Did Gambling Stocks Like $PENN And $DKNG Get Too Far Ahead Of Themselves?

Posted By Kevin Shelly on May 10, 2021 - Last Updated on May 11, 2021

Despite the wisdom of Dave Portnoy, what goes up, really must come down. That includes once soaring online gambling stocks such as Penn National Gaming, which owns 36% of Portnoy’s Barstool Sports brand.

And it is not just $PENN that has come down recently.

Steep percentage declines have also hit DraftKings, GAN, Rush Street, and Golden Nugget between late March and today, as a Motley Fool story just headlined on Monday.

But the why, and more especially why now, remains a bit of mystery, despite the article’s foreboding headline: “Why Online Gambling Stocks Are Falling Off a Cliff.”

New York day trader Adam Mesh, who holds options in DraftKings, and is sitting tight, took a swing at the answer with a bit of advice thrown in:

“These things move in sectors. They all run up. They all run down. You can’t explain why. What’s going down least, that’s what you keep.”

Lofty expectations meet reality for Penn National and other gaming shares

On the same day Penn National issued a strong Q1 report that beat estimates, shares dropped about 10% to $81.89 last Thursday. And then the stock continued dropping Friday and again on Monday, closing at $81.07.

Likewise, DraftKings, which announced a strong Q1 a day later than Penn, has had a sharp recent reversal. Its stock lost $11 a share from May 5 and May 10, dropping to $45.34.

And so it went in the online gaming sector, running from bullish to bearish across the board in just a matter of weeks.

According to a Motley Fool chart within the story:

  • DraftKings is off more than 17.8% since the beginning of March.
  • Golden Nugget is down more than 29%.
  • Penn is off more than 35.5%.
  • Rush Street is down nearly 39.9%.
  • And GAN dropped about 40.25%.

‘Just normal’ market correction according to analyst

Frank Fantini, the leader of Fantini’s Gaming Report, said gaming stocks with online components had gotten “way, way ahead of itself in valuation. This is just normal. Nothing is fundamentally wrong.”

Investors now are “taking a more sober look” at gaming stock prices and looking around at alternatives.

“The next new thing. That’s human nature,” he said.

Psychology explains much of the market, in his view.

When online stocks were moving up, investors paid no attention to the fact that most of the sector was not making money but rather burning through cash to reel in customers as share prices soared.

Running for the doors is a psychological response

It was again human nature to run for the doors once the euphoria subsided, he said.

It was no surprise that coincided with Q1 investment season, Fantini added.

He also said the uncertainty over New York state’s entry into the online market remains cold water for an overheated market.

“The excess on the bull side doesn’t reflect on the fundamentals and the guidance,” in Fantini’s view, adding he believes there is room for gaming stocks to drop even lower.

“But it will settle out, barring any larger trend,” in the market beyond the gaming sector.

He likened gaming stocks weighted toward online to the dot.com darlings that crashed in 1999.

Like dot.com stocks then, it is impossible to value online gambling stocks accurately now, in his view. That’s because there is not enough experience and data in that sector, said Fantini.

Fantini likes the Barstool component of Penn

The analyst called Penn buying into Barstool “very smart.”

The buy created a major vehicle for driving the stated objective of building an omni-channel approach to its gaming product. Penn remains fundamentally a smaller market regional operation in its physical casino operations, he said.

But he says access to data from 60 million Stoolies hugely drives down the cost of recruiting new gamblers, a point that Penn often promotes to investors.

The strategy so far has landed the Barstool sports betting app in a distant third place behind FanDuel and DraftKings for market share in PA. The Barstool online casino just recently launched as the 16th iGaming option in the Keystone State.

Lead image via Dreamstime.

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Kevin Shelly

Kevin C. Shelly is an award-winning career journalist who has spent most of his career in South Jersey. He's the former assistant city editor of The Press of Atlantic City, where he covered the casino industry and Atlantic City government as a reporter. He was also an investigative, narrative enterprise, and features reporter for Gannett’s Courier-Post.

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