It's been a wild week for entertainment stock Wynn Resorts (WYNN 0.08%), the high-end casino company with operations in Las Vegas, Boston, and Macao. Wynn reported third-quarter earnings that were decent but not impressive, the CEO announced he was leaving, and on Friday morning the bombshell dropped that Wynn is no longer spinning off its online gambling business to a SPAC.
These moves aren't necessarily surprising. Outgoing CEO Matt Maddox has been through arguably the most difficult tenure a gambling CEO has ever seen. And on the online gambling side, Wynn is a small player that needs a different strategy than bigger rivals. Here's a look at what's happening and how to look at it as investors.
A gambling business update
It's worth taking a look at what operating results looked like in the third quarter. Revenue was $994.6 million, up from $370.5 million a year ago in the middle of the pandemic. Adjusted property EBITDA, which is a proxy for cash flow from resorts, was $154.6 million, which was driven almost entirely by Las Vegas.
Not surprisingly, Las Vegas performed well, with $476 million in revenue and $183.4 million in EBITDA. If those results continue, 2022 could be the most profitable year on record for Wynn Las Vegas. And Boston results were decent, with revenue of $192.2 million and EBITDA of $64.6 million.
It's Macao that was down, with Wynn Palace revenue of $181.3 million and adjusted EBITDA of just $12.1 million. Wynn Macau generated $130.7 million in revenue and had a negative $1.9 million in property EBITDA.
Las Vegas is thriving, Boston Harbor is improving, and Macao continues to be a drag. None of this is surprising given industry trends. The big wild card is that if Macao recovers, it could be a cash flow machine -- but we're not there yet, and we don't know how long a Macao recovery will take.
What happened in iGaming
The Wynn Interactive spin off with a SPAC called Austerlitz Acquisition Corporation I (NYSE: AUS) was called off this week, which caught investors a little by surprise. Management said on its earnings call that spending to acquire customers is simply too high, with companies like DraftKings (NASDAQ: DKNG) and MGM Resorts (NYSE: MGM) pouring tens of millions of dollars into growth spending. The companies believe that spending to acquire customers now will pay off long-term, because each customer has a high lifetime value.
Wynn can't compete with these companies, which have bigger footprints, and its brand was never built to be a top market share company. So management plans to pull back spending and focus on high ROI customers, which simply may not fit the SPAC model.
Instead of going public via SPAC, Wynn Interactive will remain under Wynn Resorts' control, and the company hopes to make it a profitable segment. Time will tell if the new strategy works, or if scale is necessary to win in online gambling.
Where does Wynn Resorts go from here?
As busy as the week has been, the news from Wynn Resorts has largely been business as usual. The company is performing well in Las Vegas, with consumers and businesses coming back in droves. Boston sees some of the same trends.
Macao is down for everyone, so breaking even on an EBITDA basis may be all investors could expect from Wynn Resorts. I think this could still be a very profitable segment for the company, but it's not today and we don't know when that will change.
Long-term, keeping the online gambling segment in-house and focusing on profitable customers could be the best move. It wasn't clear that the SPAC path had a profitable future, and with so much competition it may be a better idea to hunker down and focus on what makes money in online gambling. That may not lead to the short-term bump in value that a SPAC may bring, but Wynn Resorts has never been the kind of company to think short-term, so the move fits its business model.
Wynn Resorts doesn't have a lot of big growth options like you can see at companies like MGM and DraftKings, but it should be a cash flow machine, and that can be good for investors. Right now, the company is generating an annualized $600 million in adjusted EBITDA, and once Macao returns to normal that number could more than double. That's money that can be used to pay dividends or buy back stock -- and if you're a Wynn Resorts investor, that's where you should be focused as the company's operations improve.