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Down 80%, Here Are 2 Reasons to Buy Penn National Gaming and 1 Reason to Hold Off

Penn National Gaming (NASDAQ: PENN) bounced back strongly after the coronavirus pandemic devasted the business. The regional brick-and-mortar casino operator was forced to close its doors to gamblers temporarily. Revenue fell by 33% in 2020 as a result.

Fortunately, casinos are reopening, and folks are returning in droves as gambling provides a much-needed distraction from the several-year-long pandemic. Let’s consider two reasons investors should buy Penn National Gaming stock and one reason to pause.

1. Folks are returning to casinos

In its most recent quarter, which ended on March 31, Penn reported revenue of $1.56 billion. That was 23% higher than in the same quarter of the prior year and a record-high for Penn. Growth was fueled by its most loyal customers, who visit more often and spend more with each visit.

US Personal Savings data by YCharts.

While inflation may be soaring amid supply chain disruptions and the Russian invasion of Ukraine, consumer savings remain robust after years of higher savings and several rounds of fiscal stimulus during the pandemic. Management noted that the momentum from the first quarter is carrying into the second. The better-than-expected results led Penn to raise its forecast for yearly revenue of $6.35 billion.

That will be its highest revenue in the last decade if it hits the target. After being cooped up at home for such a long time, consumers are eager to get out of the house for some adult fun that Penn’s casinos provide.

2. The mobile gaming segment is thriving

Another compelling reason to invest in Penn is its foray into mobile gambling. The company offers gamers the option to wager online in several states and Ontario, Canada. The segment that includes online betting grew to earn $142 million in revenue in the quarter ended in March, up from $86 million in the same quarter in the prior year.

Online gaming offers growth potential more significant than the brick-and-mortar side. That’s because folks can go from an impulse to a wager in seconds with a mobile device. It removes a major friction point from many would-be gamblers who won’t visit because the nearest brick-and-mortar casino could be more than an hour-long drive away.

The online business also gives Penn an avenue to attract new customers to its ecosystem, where it can send them offers to entice them to visit one of its brick-and-mortar casinos. Indeed, since launching the online segment, Penn’s customer database has increased by one million. The growth in signups has been particularly robust in the younger demographic.

One reason to hold off buying Penn National Gaming

PENN PE Ratio data by YCharts. PE ratio = price-to-earnings ratio. PS ratio = price-to-sales ratio.

Penn National Gaming’s stock is not cheap. Despite falling by 80% from its highs, the shares are trading at an average valuation over the last five years when measured by its price-to-sales, price-to-free-cash-flow, and price-to-earnings ratios. That is perhaps not what investors might have expected after such a steep fall in the stock price. Of course, no one can fault those who want to pay a fair price for a good business, but the absence of a bargain valuation could be a reason to hesitate.

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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