Wynn Resorts (NASDAQ:WYNN) has been one of the hottest stocks on the market since the depths of the recession, but with those gains come high expectations from investors. So what should shareholders or potential buyers be worried about? Here are the three biggest reasons Wynn Resorts' stock could fall.
Macau slows from incredible growth
One of the biggest risks facing Wynn and other gaming operators in Macau is a potential slowdown in gaming revenue that has been booming for a decade. Slowing or even negative growth would be bad for the market as a whole -- and we may already be seeing that slowdown occur.
Both June and July showed a decline in gaming revenue year over year in the Chinese gambling mecca, which has been rare in the past decade. As you can see below, the pullback is startling.
A few events over the summer, including the World Cup and a recent crackdown on corruption in China, could have delivered negative short-term impacts to gaming revenue. But Wynn gets 74% of its EBITDA from Macau and the stock could fall significantly if this is the beginning of a long-term trend.
Can Wynn Resorts transition from VIP to mass market?
While a slowdown in the Macau market as a whole is a fairly macro risk, a more specific danger to Wynn Resorts is a slowdown in the VIP market.
Wynn typically caters to high-end gamblers who bet hundreds of thousands or even millions of dollars on a trip. They're brought in by junket operators, which negotiate discounts for the gambler and take a percentage of the winnings.
This high-end market is beginning to show signs of weakness, particularly compared to the mass market. Second-quarter VIP baccarat play was down 16% sequentially from the first quarter and is on pace to be flat for the year (assuming second-half revenue equals first-half revenue). By comparison, if mass market baccarat play is flat in the second half of this year, the market would still grow 23.4% in 2014.
To further complicate the mass market, each of the six concessionaires in Macau are building new resorts or expansions on the main Cotai Strip, meaning that competition will increase. If mass market gamblers gravitate toward other casinos that specialize in that market, Wynn could see less profit from its own planned Cotai resort, which would be a huge disappointment for investors.
Las Vegas takes a turn for the worse
With all of the growth in Macau it's easy to forget that Las Vegas is still the birthplace of Wynn Resorts. And it's where the company gets 26% of its EBITDA and much of the cash flow that's paid out in dividends to investors. So, performance in Las Vegas is very important for Wynn Resorts.
We saw what a risk the U.S. economy is to Las Vegas when the recession hit and many projects and gaming operators in Las Vegas went bankrupt. Lavish vacations and gambling are one of the first expenses to be cut when times get tough and if the economy sinks into another recession there would be downside for Wynn and Encore Las Vegas.
Despite these risks, I think Wynn Resorts will outperform the market over the long term, but the risks of Macau's gaming market and the one in Las Vegas need to be understood. This is not a bet for a risk-averse investor, but investors with a high risk tolerance and a long-term time horizon could see big gains in Wynn Resorts if they can hold on for the ride.
Dividends for the next decade
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Travis Hoium manages an account that owns shares of Wynn Resorts, Limited. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.