With its share price up by 45% year-to-date, MGM Resorts (MGM -1.20%) is an outlier in the sports betting industry. Close rivals like Draftkings and Penn National Gaming have seen their stock performance falter -- they're up just 13% and down 5%, respectively, as investors have taken profits. MGM looks poised to continue outperforming its peers because of its relatively good valuation, spectacular sports betting guidance, and the recovery in its traditional casinos. Let's dig deeper into why it is my top stock to buy right now.
Traditional casinos are improving
While online sports betting is MGM's most exciting growth catalyst, the company's physical casino operations are equally important. This business was hit hard by the coronavirus pandemic, but MGM's presence in both regional and traditional gambling hubs (like Las Vegas and Macau) is helping to boost its recovery. First-quarter net revenue is down 26% year-over-year to $1.65 billion, a dramatic improvement from the fiscal fourth quarter when sales fell 53% against the prior-year period.
Regional casinos are recovering the fastest (down just 2% to $711 million). China-Macau operations are technically up 9% to $296 million, but this comparison can be misleading because the prior-year period already faced significant COVID-19-related headwinds. Las Vegas Strip revenue is down by 52% to $545 million year-over-year. But analysts at Morgan Stanley also predict a "fast, strong recovery," citing high airline ticket sales and hotel occupancy rates in the gambling hub.
Sports betting is a transformational opportunity
The sports betting industry is also enjoying massive tailwinds. According to analysts at Eilers & Krejcik Gaming, single-game sports betting is legal in 31 states and available to 56% of the U.S. population. They estimate total revenue to grow 360% to $1.24 billion in 2021, and eventually hit $19 billion if all 50 states legalize the pastime.
MGM's management is also optimistic, expecting a long-term total addressable market of $32 billion for sports betting and online gaming in North America. With an expected market share of 20-25% (implying sales up to $8 billion) and an expected long-term EBITDA margin of 30-35%, this is a transformational opportunity. And MGM is making impressive progress in keeping itself ahead of the competition.
The company is leveraging its established casino brand to create an omnichannel marketing strategy that leverages its real-world destinations and loyalty program, M Life, into a unique experience. According to CEO William Hornbuckle, 10% of new BetMGM players came from MGM, and 44% of new M Life subscriptions come from BetMGM. The company is also expanding into other betting-related verticals like horse race wagering through a deal with the New York Racing Association to allow customers to watch and wager on races at over 200 tracks globally.
So far, the BetMGM app has the top market position in Michigan, Colorado, and New Jersey, and it already boasts a total market share of 22% across all jurisdictions, in line with management's long-term guidance of 20-25%.
Shares are still relatively affordable
With a market cap of $20 billion compared to trailing-twelve-month revenue of $4.4 billion, MGM Resorts boasts a price-to-sales (P/S) ratio of 4.6. This valuation looks reasonable considering the impressive recovery in its brick-and-mortar casinos and the massive opportunities in sports betting and online gambling, which could add up to $8 billion in sales if the company meets its market share targets. (Management hasn't provided a specific date for these assumptions.)
For comparison, diversified sports betting rival Penn National Gaming trades for three times sales, while the "pure-play" Draftkings trades for an eye-watering 23 times sales. BetMGM isn't the cheapest sports betting stock, but it is attractively valued relative to its peers and spectacular long-term potential, making it a no-brainer buy.