There are different ways to find value in the stock market. Some investors play it safe by making their stock bets on blue-chip companies with consistent profits, while others opt to "risk it all" by betting on beaten-down gems they think are poised to reinvent themselves. MGM Resorts International (MGM -0.69%) falls into the latter category.
Let's explore the reasons why this casino giant currently trading at value stock prices offers some of the best bangs for your buck if you want to put an investment stake in the sports betting and online gaming industries.
A relatively cheap valuation
With a market cap of $15.5 billion compared to 12-month revenue of $6.6 billion, MGM boasts a price-to-sales (P/S) ratio of 2.3. That is slightly lower than the casino industry's average of 3.6 but represents a good value compared to sports betting rivals like Penn National Gaming and DraftKings, which report P/S ratios of 4.3 and 48.7, respectively.
A top-line multiple doesn't mean much without factoring in profit margins -- and MGM isn't profitable right now. But the company is making impressive progress toward recovering from the coronavirus pandemic, which is still a headwind for the entire tourism industry.
MGM Resorts' third-quarter revenue fell 66% to $1.1 billion, leading to a net loss of $535 million. But that result is a dramatic improvement over the company's second-quarter report when revenue fell 91% against the prior-year period. MGM has reported the fastest recovery in its portfolio of regional U.S. casinos among its peers. And the rollout of COVID-19 vaccines in the U.S. could help accelerate the turnaround.
Sports and online betting could power growth
While the traditional casino business is bouncing back, MGM's real value comes from the new opportunity in sports and online gaming it is exploring. The industry is expanding rapidly -- with analysts at Morgan Stanley estimating that 12 new states could legalize these pastimes in 2021.
MGM could have an edge in this market because of its high-profile gambling brand which was forged, in part, by its high visibility properties on the iconic Las Vegas Strip.
Management projects the sports betting market to soar to $20.3 billion by 2025 and expects to capture a market share of 15% to 20% -- potentially representing additional revenue of $4 billion in the best-case scenario. The company's BetMGM platform has met expectations so far with a 17% share of sports betting and online gaming markets where it is active.
In January, MGM Resorts launched its mobile app, BetMGM, in Michigan. Users will enjoy video poker, blackjack, and other casino games, along with the opportunity to redeem rewards for experiences at real-world casinos. This synergy between MGM's digital and physical properties is a unique selling point competitors may struggle to replicate.
An unconventional value stock
Value stocks are typically mature and stable businesses with consistent profits. MGM Resorts doesn't fit well into that category right now as the coronavirus pandemic has battered its operations. However, the casino giant still offers tremendous value relative to its competitors in the online gaming industry because of its low market cap and leadership position gained through its strong brand in the industry.