The rise of the Asian gaming capital of Macau was a godsend for the casino industry, and Melco Resorts and Entertainment (MLCO 0.49%) found itself at the epicenter of growth in the former Portuguese colony. Founded through the collaboration of a Hong Kong-based company that originally specialized in electric utility service in Macau and the Australian gaming giant Crown Limited, Melco recently changed its name from Melco Crown Entertainment, reflecting Crown's decision to sell off a portion of its holdings to make Melco International Development the majority owner. With Macau having gone through turbulent times, Melco stock fell sharply from 2014 to 2016, but now, a rebound has lifted shares of the entertainment and casino stock. Looking forward, many think that Melco could see even greater gains ahead.
The rise and fall of Melco
In the early 2010s, Melco benefited greatly from the rise of Macau as the gaming center of the world. Impressive growth lifted shares of Melco and its rivals, and the potential for the area seemed limitless. As China and other surrounding nations reached unprecedented levels of prosperity, interest in the region rose dramatically, and visitors saw Macau as a destination they couldn't miss.
Within the casino industry, Melco had the virtue of being a nearly pure play on the Macau market. By contrast, bigger companies like Las Vegas Sands (LVS -1.18%) had more exposure to the global gaming industry, but with all the action happening in Macau, operations in Las Vegas and in other slower-growth areas only held Sands back despite its first-mover status both with its Sands Macao resort and in moving to the Cotai Strip with its Sands Cotai Central property. By early 2014, Macau was the only place to be for gaming, and Melco commanded considerable respect with a sky-high valuation.
Just when things seemed to be unstoppable for Melco, the bottom fell out of the Macau market. Gross revenue in the city topped out and started to decline, and Melco's response to push abroad and open its City of Dreams Manila resort had a diversifying impact but showed how quickly sentiment turned about Macau's prospects. It took years for Macau to hit bottom, and Melco lost more than two-thirds of its value.
Image source: Melco Resorts.
Why things are looking up for Melco
Coming into 2017, Melco faced a tough situation. New resorts from competitors threatened to make its market-share decline even further. Changing strategies among other casino players led to a greater emphasis on the mass market, which had been Melco's strong suit.
Yet the stock has bounced back, and optimism among investors is behind the move. Part of the positive mood comes from hopes that Melco can win entry into the long-closed Japanese market, where the government is expected to allow at least one gaming license for a major resort. It will likely be the end of 2017 before Japan moves forward, but a Melco win on the island nation could be a huge growth driver going forward.
Also, Melco's rebranding effort is driving interest in the company. The departure of Crown gives Melco the chance to polish its image, and that could give it a competitive advantage as visitors look for innovation and novelty rather than history.
Finally, Macau itself has recovered sharply, with double-digit gains in revenue. Melco is getting its fair share of that rising revenue, and the prospect for non-gaming operations to bring in greater sales appears likely to be the long-term driver of true growth for Macau.
Keep your eye on Melco
Melco Resorts and Entertainment has a lot further to go before its stock can regain its past heights. However, now that Macau has gone through the depths of its business cycle and appears to be on a sustained upswing, Melco will have the opportunity to prove that it can move ahead of its industry rivals and stake its claim to healthier conditions -- not just in the former Portuguese colony but also throughout the booming Asia-Pacific region more broadly.
