Few industries have been as negatively impacted by COVID-19 as the gambling industry. Casinos across the U.S. were shut down for months, travel has dropped like rock, and people are naturally avoiding spaces with lots of people, which is where gambling companies make their money.
When we look at MGM Resorts (MGM +0.99%), its business is mostly operational across the U.S. today, but it'll be at the mercy of consumers and businesses and their appetite to spend money and take the inherent risks associated with going to indoor entertainment locations. That puts a lot of uncertainty on the company for the foreseeable future.
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MGM's survival story
Before we get to what the future looks like, let's look at what the next few months or quarters might look like. MGM Resorts said that it would burn about $270 million per month while resorts were closed, and even after opening that may be a good proxy for cash outflows from its resorts. We shouldn't expect revenue to recover sharply, so the hope would be that it covers the added labor and operating expenses of opening again.
To pay for these expenses, MGM had $4.6 billion of cash on the MGM balance sheet (excluding MGM Growth Properties and MGM China) when first-quarter results were announced, and $1.4 billion of redeemable partnership units in MGP. Seven hundred million dollars of that was redeemed in May, so MGM should have about $5.3 billion of cash on its balance sheet to weather this storm.
On the debt front, there isn't any U.S. debt due until 2022, so in theory, MGM has enough cash to survive for nearly 20 months without revenue. A company can't burn all its cash and remain solvent, but the point is there's a long runway even if COVID-19 impacts business well into 2021.
The upside potential
If you look at MGM's future, if it can get through the current pandemic, it could have a lot of upside for investors. In 2019, the company generated $3 billion in EBITDA ($2.3 billion excluding MGM China), a proxy for cash flow from resorts. If we use that as a proxy for cash flow after recovery, the stock may be a value.
Debt at MGM Resorts excluding MGM China and MGP is about $6.25 billion after the recent $750 million bond offering. The company's market cap is just $8 billion. That enterprise value of $14.3 billion is just 6.2 times 2019 EBITDA from the company's operations outside of Macao. And investors are getting upside from MGM's Macao operations essentially for free.
Not only is MGM Resorts potentially a good value if operations recover, but the company may also have upside outside of the traditional casino.
MGM is an online sports betting leader
MGM Resorts has quietly built a big online betting business with BetMGM, which is a joint venture with GVC Holdings. The company is expected to operate in 11 states by the end of 2020 and generate about $130 million of revenue.
Online gambling in both casinos and sportsbooks could potentially be huge business, and investors have already bid up the pure-play DraftKings to an $11.6 billion valuation on that potential alone. Given the MGM brand and potential for resort and casino rewards for players, I could see MGM's online gambling business being even bigger than DraftKings. And investors are essentially getting that upside included without the premium cost of buying a stock like DraftKings.
MGM Resorts stock is a buy
The road will be rocky, but I think there's too much upside potential to ignore in this casino stock. Eventually, consumers and businesses will pour into resorts and casinos again, and the upside potential for a business like online gambling is too big to ignore. I'm keeping my thumbs-up rating on MGM Resorts' stock on My CAPS page and will be adding shares to my portfolio when trading rules allow. That's how bullish I am on this stock, and I think it will be a growth stock following the pandemic, fueled by online betting and incredible upside in Macao.
