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Could MGM Resorts Be a Millionaire-Maker Stock?

By Rich Duprey – Jun 14, 2020 at 2:30PM

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You need to balance whether it's worth wagering that this resort operator can overcome some big risks.

If you're willing to take a gamble, I like the odds on MGM Resorts (MGM -0.90%) making a full recovery from its recent collapse. The global casino industry was hit hard by the coronavirus pandemic as resorts were one of the first businesses ordered closed by officials to control the spread of COVID-19.

Although MGM's stock has nearly quadrupled in value from the low point it hit in March, it remains more than 30% below where it traded before the crisis struck. There are some good reasons to believe the pessimism that still exists around the industry is valid, but such periods of uncertainty are also prime opportunities to capitalize on doubt.

But before making a big bet on the casino's comeback, let's look at a few of the biggest issues an investor needs to consider.

Close-up of a roulette wheel in action

Image source: Getty Images.

Why it's a risky bet

Although MGM Resorts has lower exposure to China's Macao market than do Las Vegas Sands (LVS -2.62%) and Wynn Resorts (WYNN -2.05%), it's not no exposure and the 23% of total revenue the region accounted for last year is a significant portion of its business.

The extent to which MGM was hurt by the coronavirus outbreak in China was evident in its first-quarter earnings report, which showed a 63% decline in net revenue for its MGM China division reducing the country's contribution to total revenue to just 12%.

What was noteworthy was Macao has largely been open throughout the crisis. After closing for two weeks in early February, the city's integrated resorts have been operational since, but revenues have still vanished. May monthly gambling revenue plunged 93% following a 97% drop in April and an 80% decline in March.

The tensions between China and the U.S. over the pandemic could also weigh on MGM (and Sands and Wynn, too) as concessions to operate in Macao are coming up for renewal soon and could be used as a bargaining chip.

Now Las Vegas has reopened, along with a number of regional markets, but a return to normalcy is still a long way off. MGM CEO Bill Hornbuckle says it's going to be a long time before the large-scale events the Vegas Strip is known for return. 

Moreover, it is going to be a while before the travel and tourism industry is reborn, and as the largest operator in Las Vegas meetings, incentive travel, conventions, and events (MICE), it may lag behind other casino operators as consumers delay spending on such programs.

Some reasons to buy

The collapse of gambling in Macao is instructive, but not necessarily defining for Vegas or other U.S. markets.

Although casinos are reopening here with numerous social distancing protocols in place, there aren't the same sort of strict travel restrictions that are the root of China's gambling revenue problem. Tourists and residents of Macao are required to undergo two weeks of quarantine upon entering the city, which has all but killed the incentive to travel there. There is also only one point of entry now into Macao, though officials are negotiating to open up others again.

Las Vegas doesn't have such restrictions, nor does Atlantic City, N.J.; Springfield, Mass.; Maryland; or other places where MGM operates. Regional operations represent 25% of revenue in a normal year and 30% of adjusted profits, meaning its geographically diverse business could soften the blow of any one market's decline, even if Vegas accounts for 45% of revenue and 54% of adjusted earnings.

The verdict

If you invested in MGM Resorts when it hit rock bottom in March, you'd probably have a better chance of being closer to the resort operator being a millionaire-maker stock for you. 

I had cautioned against buying in at the time because of the sheer weight of the unknowables present then and the experience casinos in Macao were having at the time. While it's become clear since the two markets are very different, there remains a lot of uncertainty surrounding the industry's recovery.

Even so, an investor with an appropriate long-term mindset could very well make a lot of money investing in MGM Resorts now. Gambling isn't going to end, Las Vegas isn't going away, and MGM appears to have the financial wherewithal to withstand the worst the pandemic has to offer.

Don't expect to become a millionaire overnight, but this resort operator is a winning bet over the long haul.

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

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Stocks Mentioned

MGM Resorts International Stock Quote
MGM Resorts International
$29.72 (-0.90%) $0.27
Wynn Resorts, Limited Stock Quote
Wynn Resorts, Limited
$63.03 (-2.05%) $-1.32
Las Vegas Sands Stock Quote
Las Vegas Sands
$37.52 (-2.62%) $-1.01

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