Gaming companies with exposure to Macau have had a rough 2018 as investors worried the world's largest gaming market had hit a weak point. Wynn Resorts (NASDAQ:WYNN), Melco Resorts (NASDAQ:MLCO), and Las Vegas Sands (NYSE:LVS) have all fallen double digits as Macau concerns have spread.
The low point was after third-quarter earnings reports when Wynn's management, in particular, indicated that Macau may be in for a slowdown. That was after a poor September, and they were seeing weakness in the premium market that accounts for about two-thirds of all Macau gaming revenue. But the past two months have turned the narrative around, and there may be some positive signs emerging from Macau.
The ups and downs of Macau gaming
The chart below shows what investors were seeing in Macau's gaming revenue over the last few months. You can see that September was extremely weak, and the three-month simple moving average appears to be trending lower from May to September.
The revenue jump you see in October was due to Golden Week, when gambling is always abnormally high. But it can be an aberration when looking for broader gaming trends in Macau, so the market largely looked past it.
November is where the real surprise came in, and it's sent gaming stocks higher. Gaming revenue was up 8.5% versus a year ago to $3.1 billion without any artificial boost from the calendar. Maybe fears of a slide in gaming revenue were overblown?
There's not a trend...yet
In Macau, investors often try to look for trends before a real trend is established. That's why falling revenue from June to September sent shockwaves through the market. But it's possible that falling gaming revenue was an aberration and not a trend. October and November tend to show that revenue will be fairly stable for the year.
The good news is that there aren't any major travel restrictions or corruption crackdowns in China or Macau, which have been a precursor to past revenue declines. From a policy standpoint, Macau is relatively stable, which is good news.
What we don't know is if Macau's gaming revenue has stabilized, or if it's back on a growth trend again. It'll take a few months, at least, to tell if there's a real trend.
Don't forget: Macau is a cash cow
What investors shouldn't forget is that Macau is still a cash cow for the industry, even if revenue falls slightly. The chart below shows EBITDA, which is a proxy for cash flow from casinos, and you can see that Las Vegas Sands, Wynn Resorts, and Melco Resorts are all generating over $1 billion in EBITDA.
Even if Macau's gaming revenue declined 10% or 20%, resorts would still be generating cash every quarter. That's the benefit of the major costs being incurred during construction -- once a casino is open. it's like a cash machine, especially in Macau.
What to make of gaming stocks today
The decline of gaming stocks so far in 2018 has left them in great value territory for long-term investors. You can see below that Las Vegas Sands and Melco Resorts are trading below 12 times enterprise value to EBITDA. and Wynn's 15.2 times ratio is artificially high as Wynn Palace ramps up and Encore Boston Harbor prepares for a mid-2019 opening.
If Macau gaming revenue continues to be stable or even begins to rise in early 2019, gaming stocks could prove to be big winners for investors.