It's been a rough summer for the world's leading gaming industry stocks. Las Vegas Sands (LVS -0.36%), Wynn Resorts (WYNN -1.72%), Melco Resorts (MLCO), and MGM Resorts (MGM 0.87%) have all fallen by double-digit percentages from their 2018 highs, and some have tumbled by more than 30% since May.
Those declines have been a bit odd, because they haven't coincided with a collapse in the economy, nor for gambling in general. But there are a few factors that investors see as increasing the risk of gaming companies over the long term.
Macau. Image source: Getty Images.
Macau's high growth days may be coming to an end
In mid-2016, Macau's gaming revenue began to recover from its multiyear drought, and investors thought that growth trend could continue for a long time. But gaming revenue has stagnated in the Chinese territory since early this year, and may even be in slight decline.
Macau gaming revenue has been growing steadily until recent months. Image by the author. Data source: Macau Gaming Inspection and Coordination Bureau.
A few factors could be impacting Macau's gaming industry, and none of them bode well for it long term. One is that new resort construction is nearly complete, which means that the tourists and gamblers who began visiting in 2016 to see the latest spectacles will no longer have fresh inducements to return. There will be some minor hotel additions over the next couple of years, but Melco, MGM, Wynn, and Las Vegas Sands have all opened new resorts in the last few years, and none has a major expansion on the horizon.
Macau's table game limit could also become a constraint. Resorts there are restricted in terms of how many gaming tables they can have, which puts something of a ceiling on the gambling revenue they can generate. Even if larger numbers of mass-market tourists want to gamble more, they may not be able to find seats.
Competition from nearby countries like The Philippines, South Korea, and Singapore could be siphoning off customers, spreading gaming revenue over a broader set of casinos. Macau used to be the only major gaming hub in Asia, but now the competition is fierce.
The cost of business is going up
Gaming companies have managed their finances well enough that debt isn't a potentially devastating risk to operations, but all four of those I've mentioned have billions in debt on their balance sheets, so even a small rise in interest rates will reduce profitability. And you can see below that interest rates are heading upward.
10-Year Treasury Rate data by YCharts
Over the past year, the 10-year Treasury rate has risen about three-quarters of a percentage point to 3.1%, and with the Federal Reserve expected to continue boosting the fed funds rate in coming quarters, it wouldn't be surprising to see the 10-year rate rise even more. That's a headwind that could be pushing investors out of gaming stocks.
The future looks murky in gaming
Sentiment often drives gaming stocks over the short term, and as 2018 has gone on, sentiment toward the industry has gotten worse. I don't think that will change unless we see Macau's revenue trends improve, which may not happen this year. The good news is that gaming companies are still generating billions in free cash flow, which will continue to fund the dividends that have become a big value driver for long-term investors.
