May marked Macau's 10th straight month of higher year-over-year gambling revenue. Not only did the gains exceed analyst expectations, but it was also the Chinese gambling enclave's best monthly performance in more than three years.

It seems to put to bed any doubts that Macau's comeback is real and sustainable, and shares of casino operators responded as expected, with Las Vegas Sands (NYSE:LVS), Melco Resorts & Entertainment (NASDAQ:MLCO), and Wynn Resorts (NASDAQ:WYNN) all bounding higher. But the easy money has been made, and the casino operators need to show whether they can carry these gains forward now that they've surpassed the lowest point of the two-plus-year downturn.

City of Dreams resort behind Venetian canal in Macau

Image source: Getty Images.

Playing a hot hand

Officials said gambling revenues last month hit 22.7 billion patacas (about $2.8 billion), a 23.7% increase from May 2016, when Macau saw 18.3 billion patacas roll in. The percentage gain was the best the region has seen since February 2014 and was a surprising reversal to what seemed like slowly sagging stamina in the recovery, particularly since analysts were expecting revenue to rise only 16.5%.

Yet they also said May's performance was remarkable because of what seems to be very healthy VIP gambler numbers, with analysts at JPMorgan Chase estimating that VIP revenue rose as much as 35% for the month.

With the mass-market audience still robust and VIPs remaining strong despite factors that were expected to throw the numbers off kilter, Macau is looking to be back. Still, there's reason to hold off breaking out the bubbly, or at least not drinking so much.

Now comes the hard part

First, after the alleged crackdown on corruption, Macau went into a tailspin that didn't hit its nadir until June of last year, when gambling revenue came in at a paltry 15.9 billion patacas ($2 billion), some 58% below the February 2014 peak of 38 billion patacas. So that suggests when this month's gambling revenues are published we'll have another big percentage gain to report, and July will probably be the same, but after that it's going to become increasingly difficult.

Macau monthly gaming revenues chart

Data source: Macau Gaming Inspection & Coordination Bureau. Chart by author.

Last August, the Wynn Palace opened its doors in a bid to comply with an edict from Chinese officials to generate more revenue from non-gambling sources, and the opening seemed to mark the turning point for the operators, as revenue that month rose 1%, the first time in 26 months there had been a year-over-year gain. Las Vegas Sands followed the next month with the opening of the Parisian, and Macau has now run a string of 10 straight months of growth.

Yet more venues and hotels will be opening still, with MGM Resorts' (NYSE:MGM) Cotai resort going live later this year, and hotels such as The 13, Lisboa Palace, and Melco's fifth hotel tower, Morpheus at City of Dreams, all coming online. There's the potential for Macau to have too much capacity now in relation to demand.

Reasons for hope

A number of factors seem to help explain Macau's recovery, not least of which is that the anti-graft campaign has mostly run its course even though it remains in place. We still see flare-ups occasionally, as when the government arrested 18 Crown Resorts employees for improperly marketing their casinos on the mainland, or when it limits the amount of money that can be withdrawn from Macau ATMs at any one time, or as it fingerprints all foreign visitors coming into the country. But the edge certainly seems to have been taken off.

A woman looks through a magnifying glass at a model house piled on a stack of blocks.

Image source: Getty Images.

The return of high rollers to Macau's casinos has also coincided with rising property values on the mainland, an important consideration because VIP gamblers often use property as collateral when staking their bets. Rising property values also help bolster the discretionary spending of mainland Chinese who visit Macau's new tourist attractions, but whether higher prices will remain elevated is another matter as China tries to curtail further increases. China's largest developer recently reported that May sales fell more than 16%, and prices had fallen 14% month to month, though an industry researcher says prices in major cities could rise another 50% before all is over.

That means Sands, Melco, and Wynn risk becoming complacent and relying too heavily once again on the bets VIPs place. Because they are highly subject to the vagaries of political whim, that could be a catastrophe.

There's no question Macau is healthier than it was and will probably improve further going ahead, but investors should remain cautious because the casino operators are about to lap the nadir in the gambling bust and yearly comparables will get progressively harder from here.

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