The stock market fell sharply last week, and investors are still waiting to see if major market benchmarks hit bottom Friday when they challenged the lowest levels since June. On Monday morning, it appeared that Wall Street was preparing for another leg lower, as the Dow Jones Industrial Average (^DJI -0.26%), S&P 500 (^GSPC 0.03%), and Nasdaq Composite (^IXIC 0.12%) had all fallen another half percent or more as of 8 a.m. ET.

One area of the market that was able to buck the downtrend was the casino stock industry. Gains for Las Vegas Sands (LVS -0.14%), Wynn Resorts (WYNN 0.31%), and Melco Resorts & Entertainment (MLCO 1.31%) came amid news that their core resort market of Macao is poised to reopen more fully from its harsh pandemic-related restrictions. Yet even as casino stocks jumped, the bigger question remains whether would-be patrons will be in good enough financial condition to release their pent-up demand at the slots and gambling tables.

Opening the doors to China

The key news came from local Macao public officials, who eased some of the limitations they had imposed since early 2020 when the pandemic first started. Under the restrictions, visitors in tour groups from China's mainland had to go through a long and involved process in order to receive the documents necessary to visit the Asian entertainment mecca. Under a phased-in approach that will start in November, Macao will allow Chinese tour visitors from five coastal provinces, including Shanghai, to enter Macao without going through that process.

Macao followed suit as neighboring Hong Kong followed through on plans to end its requirements for visitors from abroad to go through a period of quarantine in hotels. Both special administrative regions have seen their local economies take huge hits due in part to the zero-COVID policy the Chinese mainland has imposed.  

As you'd expect, the casino stocks with the most exposure to the Macao gambling market fared best. Las Vegas Sands saw its stock rise 6% in premarket trading Monday morning, with Wynn Resorts rising more than 5.5% and Melco posting a nearly 10% rise.

A long way to go

Investors are hopeful that the return to more normal conditions in Macao could spur a full recovery back to pre-pandemic levels. That would have huge implications for all three companies, because their overall levels of business activity remain dramatically suppressed compared to where they were in 2019.

For Las Vegas Sands, revenue over the past three years has been stuck at levels that are roughly 25% of the company's sales prior to the pandemic. The impact on Wynn hasn't been quite as extreme, but even with a significant bounce in 2021 from 2020's extremely depressed levels, annual revenue remains at about 60% of what it was in 2019. And for Melco, sales for 2022 are on pace to come in down about 70% from where they were three years ago.

Moreover, all three companies have seen their earnings hit hard by the restrictions in Macao and elsewhere. The only one to post a profit in 2020, 2021, or 2022 is Las Vegas Sands, and that came solely because of the company's 2021 sale of its Venetian and Palazzo properties in Nevada and the resulting one-time gains that bolstered its income statement.

The big question for casino stocks is whether visitors will rush back to Macao even under challenging economic conditions. With global stock markets under pressure, inflationary conditions hurting consumers, and ongoing concerns in Asia about the lingering effects of the pandemic, it's far from certain that Macao will bounce back all the way to its pre-pandemic success. Anything short of that could leave investors feeling disappointed.