2020 was rough for MGM Resorts International (MGM 0.74%) -- and casinos in general -- as the coronavirus pandemic virtually shut down the industry for much of the year. But now that the crisis is winding down, this embattled gambling giant is poised to reinvent itself with a massive pivot to sports betting.
Let's explore the reasons investors should be turning their attention to this Las Vegas operator.
The coronavirus pandemic is winding down
MGM stock has gained over 20% so far this year, and the rally coincides with the rapid rollout of coronavirus vaccines in the U.S. The government is administering millions of vaccine doses daily, and the country could reach herd immunity by fall, according to the White House's Chief Medical Advisor, Dr. Anthony Fauci.
Image source: Getty Images.
The rapid vaccination trend should accelerate the recovery for MGM's casino revenue, which was down 53% year over year to $1.49 billion in the fourth quarter.
CEO Bill Hornbuckle suggests revenue could recover to 90% of pre-pandemic (i.e. 2019) levels by the end of 2022. To put that projection in context, MGM generated sales of $12.90 billion and net income of $2.21 billion in full-year 2019. With a market cap of $19.3 billion as of this writing, the stock trades at 8.7 times 2019 earnings, implying a rather cheap valuation if MGM can regain or exceed its prior performance.
Sports betting could supercharge growth
But investing in MGM isn't just a bet on a recovery at its traditional casinos. The company's sports betting business is another attractive opportunity that the market may be overlooking. The stock is a far cheaper alternative to sports-betting rivals like DraftKings or fuboTV, which trade at 36.8 and 6.6 sales, respectively, while MGM sports a multiple of just 3.7.
Analysts at Morgan Stanley expect 12 new states to legalize sports betting and online gambling in 2021. And MGM expects the combined opportunity to be worth over $20 billion by 2025. Management aims to maintain a market share in this space between 15% and 20%, and so far, the company has hit that target with a 17% share as of the fourth quarter.
MGM has a competitive edge in sports betting thanks to its established global brand (the company boasts iconic locations on the Las Vegas Strip and in Macau, China). Management is leveraging this existing footprint by synergizing its digital platform with real-world experiences. For example, the BetMGM app is linked to MGM's rewards program, which allows users to earn points, benefits, and rewards redeemable at the company's resorts.
MGM is a buy
Sometimes, the market is slow to pick up on a promising turnaround story. And this creates an opportunity for investors to scoop up quality companies at low prices.
MGM is one such example as it offers exposure to the broader casino industry rebound as the pandemic subsides, in addition to an affordable avenue into sports betting, which has the potential to power the company's next leg of long-term growth. Shares will not stay this cheap for long.
