Penn entertainment (PEN 4.78%) was one of the market’s darlings during the pandemic when investors believed it could play a big role in online gambling after the Barstool Sports acquisition. But Barstool was never a good fit within Penn Entertainment, and earlier this year the company sold Barstool back to Dave Portnoy just months after completing the $500 million purchase.
On top of the Barstool debacle, the 2018 acquisition of Pinnacle Entertainment left the company with $2 billion in debt just in time for the pandemic to affect the company. The upside investors saw in Penn Entertainment a few years ago appears to have faded, but does that give investors an opportunity to buy the company at a discount?
From boom to bust
The chart below shows the wild road Penn Entertainment has been on. The stock exploded only to fall below pre-pandemic levels. Operationally, revenue has grown, but not in line with Las Vegas-focused peers that have experienced record revenue on the Las Vegas Strip.
PENN data by YCharts
Debt from the Pinnacle Entertainment acquisition isn’t crippling, but it gets more expensive as interest rates rise and the use of cash (like the Barstool acquisition) looks more like a mistake in hindsight.
PENN EBITDA (TTM) data by YCharts
Remember that Penn National is also a regional casino operator. The regional gambling market held up well during the pandemic, but historically it has not been a high-growth market, and supply is only increasing as states add gambling to their revenue mix. Unlike Las Vegas, most of Penn Entertainment’s casinos are not destinations, and I think that limits growth. In five years, Penn Entertainment may do well just keeping up with inflation and economic growth.
Online gambling becomes a cost center
Penn Entertainment hasn’t given up on being a player in online gambling either. But it is not a leader right now and it has become a money loser for the company.
In the past 12 months, Penn Entertainment burned $239 million on the interactive business and recently signed a $1.5 billion deal with Walt Disney becomes another cost center. It’s not clear whether that investment will ever pay off as online gaming losses mount at Penn Entertainment and competitors across the industry.
DraftKings (NASDAQ: DKNG) is instructive here because it is the largest public company focused on online gambling. You can see below that even a large market share has not led to free cash flow for the company. 
DKNG Free Cash Flow data by YCharts
It is quite possible that the Disney deal will make online gaming losses worse for Penn Entertainment.
Penn Entertainment is not the value it seems
You can see below that Penn Entertainment’s enterprise value-to-EBITDA multiple of 5.1 looks cheap, but competitors like MGM Resorts International and Caesar’s entertainment trades for similar multiples. And they have the advantage of being in Las Vegas, which is growing, and MGM has casinos in Macau and one under construction in Japan. I think they are better placed strategically.
PENN EV to EBITDA data by YCharts
In five years, I believe Penn Entertainment will underperform its larger rivals, who have better brick-and-mortar locations and greater scale to grow in online gambling. Penn National was a hyped stock during the pandemic, but financial results have not supported that optimism.
Travis Hoium holds positions at MGM Resorts International and Walt Disney. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool recommends the following options: long January 2025 $25 calls on Penn Entertainment and short January 2025 $30 calls on Penn Entertainment. The Motley Fool has a non-disclosure policy.