The pent-up demand for casino action many anticipated isn't panning out the way many expected, so the road to recovery for MGM Resorts (MGM -0.42%) and other casino operators is going to be a longer haul.
Yet simply because growth will be delayed doesn't necessarily mean gaming companies will be bad investments, but let's see if MGM still has what it takes to turn an investor into a millionaire.
Casinos crap out
Let's get the bad stuff out of the way first. Global gambling markets have been wrecked by the coronavirus pandemic.
- Las Vegas has reopened, but visitors aren't pouring into the city to play poker and roulette, nor even to see shows.
- Macao has been open since February, but remains crippled by COVID-19 and travel restrictions; its gaming revenue has been down by 90% or more year over year for six consecutive months.
- Japan's nascent casino sector seems barely worth the effort of attempting to join: Las Vegas Sands and Wynn Resorts both pulled out of consideration for one of the few concessions that will be handed out, and MGM now says it only wants a minority stake in one.
- Atlantic City was struggling before the pandemic, and conditions there are even direr now.
All of this has taken a toll on MGM's finances. Second-quarter revenue plunged 91% from the year-ago period to just $290 million, and the company generated an operating loss of $1 billion compared to a $371 million profit a year prior.
Slow boat to China
The immediate outlook isn't especially bright either. MGM Resorts fired 18,000 employees whom it had furloughed, and though it says it's willing to rehire them if business picks back up, analysts now anticipate that it will take three to five years for the Las Vegas market to recover.
Macao may get a lift as the government began issuing travel visas again in late September, but China has continued to tighten rules on capital outflows from the city, dampening VIP gamblers' enthusiasm to visit.
Although China only provided 23% of MGM's consolidated earnings before interest, taxes, depreciation, and amortization at the end of last year, ratings agency Fitch Ratings is expecting revenue to fall 19% from its Macao operations in 2020.
Yet because MGM also issued more debt last week in a bid to raise $750 million to refinance existing debt and for general corporate purposes, Fitch sees it adding more to its already considerable debt load of $11.3 billion. It assigned a BB-/RR4 rating to the debt, which indicates an elevated level of risk, and it has a negative outlook for the company because of Macao. (Moody's has a similar negative outlook for the company.)
A potential home run
As gloomy as all that is, there is a lot to be hopeful about. As difficult as the pandemic has been for the company, MGM Resorts' finances are still mostly intact. It has plenty of liquidity available to it, including some $4.8 billion in cash at the end of June and around $1 billion remaining on a revolving credit facility.
It also has many opportunities. Business in Vegas, Macao, and Atlantic City can only go up from here, but we can expect online gambling and sports betting to be among the sector's best near-term drivers, and those are areas where MGM has already shown leadership.
Yet it recently received an investment of $1 billion from IAC/Interactive (IAC -0.15%), which views the BetMGM platform that it helped develop as holding enormous potential. IAC chairman Barry Diller, who received an MGM board appointment following the investment, sees it as a "unique opportunity... to own a meaningful piece of a preeminent brand in a large category with immense potential to move online."
Moreover, while FanDuel and DraftKings continued to dominate sportsbooks, MGM's BetMGM and Borgata Sports platforms are close behind. MGM has been building up a sports betting empire since wagers on sporting events were legalized in 2018.
Is MGM Resorts just a roll of the dice?
MGM has been damaged by the pandemic, and while its stock price has more than tripled from its low point back in March, there is still more growth in its future.
It's still at risk of further setbacks from the coronavirus, and geopolitical events involving China could also impact its performance, but gambling will continue to be a growth market. As one of the best companies in its industry, and one of the more conservatively managed, MGM Resorts has much to recommend it as an investment, though with consumers only slowly easing their way back into casinos, it's probably still several years away from delivering on its full potential.