At its peak in 2006, the Las Vegas Strip generated $569 million in monthly gambling revenue and the region's casinos had never been healthier. But a wave of expansion and a pandemic in 2020 left the region in dire straits. In 2020, Las Vegas averaged just $311.1 million in monthly gambling revenue and for a period of time, the entire strip was shut down.
Casino stocks adjusted by raising money and cutting costs, but for more than a year the question for investors has been, how long will the recovery in Las Vegas take? Companies have been hinting that by fall 2021 business should return to a more "normal" level, but we're seeing a jump in gambling activity already. In April, the Las Vegas Strip reported $483.4 million in gambling revenue and it's likely that will continue to rise as COVID-19 infection numbers fall and vaccination rates rise. Las Vegas may already be back and could be better than ever by the end of the year.
A partial recovery so far
The recovery in Las Vegas is impressive, but it hasn't been even. Corporate customers, who drive weekday stays, have not returned in any meaningful way, but weekend consumers have come back quickly. In early May, Caesars Entertainment (CZR 4.13%) COO Anthony Carano said the Las Vegas Strip was sold out on the weekend for the foreseeable future.
It will likely take much more time for the weekday business to return. Conventions and business travel is normally planned months, or even years, in advance, so we likely won't see the full recovery of Las Vegas group stays until late in 2021 or into 2022.
Carano said that Caesars could have better convention and group business in the future than it did in 2019, saying, "Group and convention room nights on the books for the second half of '21 versus '19, are currently pacing up approximately 20%, and we're seeing good rate growth as well. 2022 group revenue on the books is pacing up approximately 15%."
Wynn Resorts (WYNN 1.73%) CEO Matt Maddox had similar thoughts on his conference call, "the back half of '21 looks good, '22 is really strong." MGM Resorts (MGM 1.98%) CEO Bill Hornbuckle was more muted, saying, "With the larger groups expected to return at scale in '22, our business in '22 and '23 is on pace with pre-COVID levels."
There's a partial recovery today with weekends performing well but weekdays are still struggling. Based on management's comments, the weekday business could be extremely healthy by late 2021.
Could Las Vegas be better off than pre-pandemic?
What's wild is to think that Las Vegas could actually be better off post-pandemic than it was in 2019. But that could happen, and bullish management comments indicate they expect a strong recovery.
It's hard to project revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization), a proxy for cash flow from casinos, in Las Vegas, but we can get an idea of demand by looking at room rates. I'll use Wynn Las Vegas as an example of where it seems room rates are headed.
In 2019, Wynn Resorts' average daily room rate (ADR) was $269 per night. That fell to $235 in 2020, although revenue per available room was only $70. But looking at Wynn's booking calendar, rates are exploding.
Casino companies don't give out rooms booked for future dates or rates, but we can get an idea of the booking trends based simply on their booking sites. For a weekday in July (Monday thru Thursday), rates for a standard king room at Wynn Las Vegas range from $159 to $399 per night. Weekend nights (Friday thru Sunday), which remember are in high demand, range from $254 to $719 per night. If we look out to September, weekday rates range from $319 to $509 per night and weekends are $339 to $899 per night, with nearly half of weekend nights currently priced over $800. There are also six nights in September that are completely unavailable at Wynn.
This isn't a perfect proxy for demand, and prices can depend on events and the time before a booking, but the direction of rates seems clear. The trend to higher room rates bolsters management comments that demand is extremely high later in 2021, and it's possible that room rates could exceed 2019 highs by later this year. That could translate to better revenue and profitability as well.
Do casino stocks have more room to run?
Is it too late to get into casino stocks? The three biggest publicly traded operators in Las Vegas have actually done well for investors over the last three years. Only Wynn Resorts is down, and that's partly driven by the decline in Macau, where the company generates most of its revenue.
I do think casino stocks will continue to do well as the economy recovers and people flock back to Las Vegas. There's likely to be high demand for entertainment and conventions over the next few years as consumers and businesses reconnect.
As a bonus, we could also see casino companies reinstate or increase dividends once cash flow starts flowing again. Casinos are actually built to be great dividend stocks because casinos require high upfront costs but generate cash for decades. And if revenue is growing then there's more leftover for investors, just another reason to be bullish on Las Vegas over the next few years.