Delay on Part 2 of DraftKings deep dive because of recent ESPN/PENN news
Sorry for the delay on part 2 of the DraftKings (DKNG) deep dive; it’s because I’m trying to assess the current financial impact of the news this week that ESPN was terminating their partnership with DraftKings and instead forming a partnership with PENN after they sold Barstool Sports back to Dave Portnoy.
ESPN and PENN will now be working together on ESPN BET which is the former Barstool Sportsbook… https://www.espn.com/espn/story/_/id/38158198/penn-entertainment-rebrand-sportsbook-espn-bet
My gut reaction is that this is bad for DKNG because ESPN has tremendous reach into the sports betting target audience and now DKNG will have to spend significantly more money on customer acquisition and now they can’t use any ESPN/ABC related media channels/websites. I was thinking about starting a DKNG position in my investment portfolio after they posted a great Q2 earnings report and raised guidance but this news has given me pause, I will wait another 3+ months to see how things play out and whether DKNG needs to adjust their full year 2023 guidance which would not be good for the stock price.
Here are some analyst notes this week about the situation…
Deutsche Bank analyst Carlo Santarelli views Penn Entertainment's (PENN) strategic alliance with Disney's (DIS) ESPN as a net positive for Penn, saying it was clear the Barstool brand didn't have the customer acquisition network it advertised and the company now has a new potential growth while essentially eliminating the risks associated with Barstool. The firm also sees the news as positive for Caesars (CZR) and DraftKings (DKNG), as it "relinquishes both from their committed spend with ESPN over the coming years." While it hasn't necessarily been widely publicized, Caesars' and DraftKings' respective ESPN partnerships were "absolute anchors," with the customer acquisition spend, through the ESPN channel, likely the most expensive channel on a per customer acquired basis, Deutsche contends. The firm thinks the breakup is likely immaterial to both companies' net revenue, and tangibly favorable for adjusted EBITDA.
BofA analyst Shaun Kelley notes that Penn Entertainment (PENN) shares were up "big" in after-hours trading while DraftKings' (DKNG) shares were down after Penn made two strategic announcements: an exclusive U.S. online sports betting agreement with Disney's (DIS) ESPN and selling Barstool Sports back to founder David Portnoy. BofA attributes much of the reaction to a cautious investor setup for Penn given both domestic core gaming concerns and uncertainty around Barstool and says it sees "a constructive risk-reward" for Penn entering the deal with ESPN, but the firm is also increasingly convinced that the product and tech barriers DraftKings and Flutter's (PDYPY) FanDuel are creating make market share moves increasingly difficult. BofA maintains a Neutral rating and $35 price target on Penn shares and keeps a Buy rating and $38 price target on DraftKings.
I’ll try to get part 2 out this weekend.
Thanks,
Jonah