Las Vegas' New Mega-Resort Is a Big Risk For The Strip

Resorts World Las Vegas will be the next megaresort built on the Las Vegas Strip. Image: Genting Group.

Sin City is home to nearly 125,000 hotel rooms and as the center of gaming in the U.S. it's constantly reinventing itself as an entertainment hub. The next reinvention is coming courtesy of Genting Group, who is building the city's next megaresorts, Resorts World Las Vegas on the north end of the Las Vegas Strip.  

The property is a $4 billion bet on the future of Las Vegas and will be the first major resorts in nearly a decade when it's completed in mid-2018. What's unknown is what impact the property will have on the rest of The Strip, which is teetering between growth and decline at the moment.

What is the state of the Las Vegas Strip?
Genting's move into Las Vegas comes at a time when the the region is facing a number of major unknowns. Las Vegas Strip gaming revenue is well off its peak of $6.83 billion in 2007 and is down 3.6% in the last twelve months to $6.30 billion.

Data source: Nevada Gaming Control Board. Chart by author.

The decline in gaming has hurt some of the region's biggest players as well. Las Vegas Sands (LVS -0.37%) and Wynn Resorts (WYNN -1.78%) have seen a declining in EBITDA (a proxy for cash flow) in Las Vegas because they depend on wealthy gamblers, while MGM Resorts (MGM -0.33%) has grown wholly owned resorts EBITDA slightly.

Source: Company earnings releases.

The results give a peek into why the new Genting resort is such a risky move for everyone involved. MGM Resorts is doing well because it caters to the lower end of the market, where hotel room revenue and other non-gaming revenue has been strong. Adding a few thousand hotel rooms to the region's supply will only dilute the value being generated.

On the gaming side, dilution could be even more detrimental, particularly on the high end. Baccarat players, particularly from China, have been the major weakness in the market and a Chinese themed hotel could be a big draw away from Wynn and Las Vegas Sands.

Resorts World Las Vegas is being built near Wynn Las Vegas. Image: Wynn Resorts.

Revitalizing the Las Vegas Strip?
On the flip side, there hasn't been a big new draw to Las Vegas since CityCenter and The Cosmopolitan opened and a new resort could welcome new customers, particularly on The Strip's north end. That's a highly optimistic outlook, but it's a consideration for gaming competitors.

What I think is clear is that Resorts World Las Vegas will pull the center of gravity in Las Vegas further north. Wynn and The Venetian are already two of the most profitable resorts on The Strip and a high end neighbor would pull more customers in that direct.

This would have a negative impact on MGM Resorts, who is concentrated on The Strip's south end. The impact might be incremental, but Luxor, New York-New York, and Excalibur may also see lower demand, which would be bad considering the fact that they're among the least profitable resorts on The Strip. 

Room for everyone?
The thing to watch for gaming investors over the next three years is how much the pie in Las Vegas grows -- or doesn't -- in both gaming and non-gaming. Genting's new supply would cannibalize existing resorts if the region stays in a lull, reducing profits for everyone on The Strip.

But if the region grows even a little over the next three years and Resorts World Las Vegas brings more excitement and new visitors it could be a rising tide that lifts all resorts. But given the ups and downs of the last decade on The Strip I'm not convinced that the bullish case will play out. Something for gaming investors to keep in mind as they look at whether or not these stocks are a good value now.