I've been a big fan of Wynn Resorts (NASDAQ:WYNN) for a long time, mainly because Steve Wynn always manages to build resorts that outperform their neighbors. And in recent years, the stock fell to a level where I thought it was a great value

But my bullishness doesn't mean I don't see risks ahead for Wynn Resorts. Here's the best case against owning the stock. 

Front view rendering of Wynn Palace in Macau.

Front view rendering of Wynn Palace in Macau. Image source: Wynn Resorts.

Macau's growth is just a mirage

The biggest driver of Wynn's recovery is that Macau's gaming market began returning to growth just as Wynn Palace opened. So far in 2017, gaming revenue is up 17.2% in the Chinese territory, and there's hope that revenue from its key industry will continue to grow as more resorts are completed and infrastructure improves. 

So far in 2017, the bull theory has held up. But conditions can change on a dime. China has been cracking down on corruption over the last few years, and it's worried about money being laundered through Macau. In the worst case, it could put restrictions on the junket operators that provide loans to Chinese high rollers in patacas in Macau, and then collect on the debts in renminbi after the gamblers return to the Chinese mainland. Squeezing those middlemen could quickly disrupt the VIP market, which accounts for nearly two-thirds of Macau's gaming revenue. 

There's also the risk that a recession could strike the U.S. or Chinese economy (or both), which would be a broad negative for the gaming industry overall. The economy is a macro risk for Wynn Resorts, but it's one investors need to be aware of given the leverage Wynn has on its balance sheet. 

Debt is adding more risk than Wynn would like

To build Wynn Palace in Macau and fund the current construction of Wynn Boston Harbor, the company has taken on billions of dollars in new debt. And its leverage, as measured by its debt-to-EBITDA ratio (a proxy for cash flow) is increasing as well. With Wynn Palace in operation, this measure of leverage will fall, but its current level is high nonetheless. 

WYNN Total Long Term Debt (Quarterly) Chart

WYNN Total Long Term Debt (Quarterly) data by YCharts

The sheer leverage of debt is what's most worrying about Wynn Resorts today. When gaming companies went into financial turmoil and bankruptcy during the financial crisis, it was primarily because they had more debt than they could handle. Wynn is walking a tightrope right now with its rising debt load. 

Wynn's risk is very real

Bullish investors in Wynn Resorts know these risks exist -- they just think the upside is greater than the downside, and that the Macau market, in particular, will keep growing. But there's a case to be made that Macau could go through another downturn like it did from 2014 to 2016. If that happens, Wynn Resorts' growing debt load could become a very real problem for the company.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.