Better Buy: MGM Resorts or Caesars Entertainment?

While online sports betting has rapidly gained popularity in recent years, the brick-and-mortar casino industry was severely impacted by COVID-19 restrictions -- and now, it's being hindered by the combination of high inflation and a slowing economy.

That said, according to research firm Statista, the $231 billion global casino and online gambling industry will continue growing through 2024 and likely beyond. Properly positioned casino companies stand to benefit from this growth as do their investors.

Let's take a look at two major players in this space, MGM Resorts International (MGM -1.49%) and Caesars Entertainment (CZR 0.59%), and weigh the question of which of these casino stocks is a better buy now.

The case for MGM Resorts International

With MGM Resorts stock down by more than 28% from its November 2021 high, investors might be asking themselves if it's time to buy the dip. While the company's $3.4 billion in Q3 revenue was a quarterly record, it was still unable to eke out a profit.

Room occupancy was a prime driver of that record revenue, reaching 93% during the third quarter. That's the highest this metric has been since COVID-19 hit. The top-line result also came in 26% higher than the same period in 2021, and that's despite a 70% decline in revenue from MGM China due to that country's zero-COVID restrictions.

After strong back-to-back quarters, CEO Bill Hornbuckle cited the attractiveness of MGM's properties both as vacation spots and as meeting places for business travelers. Convention business not only creates a considerable revenue stream for the casino operator, but also helps to gauge future occupancy levels due to its far-in-advance lead times.

BetMGM, the company's partner for both online and in-person sports betting, also continues to make significant progress. After adding Kansas to the list of states where it was available in Q3, MGM next plans to debut it in Massachusetts, Ohio, and Maryland. MGM controls a 29% share of the online casino gambling market, making it the leading U.S. player in this fast-growing space.

The case for Caesars Entertainment

Caesars Entertainment stock has fallen even more dramatically during the past year, and now trades more than 58% below its October 2021 peak. However, Caesars also posted record third-quarter results, and management recently described October 2022 as the "strongest month ever" for its Las Vegas business. 

In Q3, the casino company observed its first taste of "normal seasonality" since the pandemic and booked more than $1 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Occupancy in Caesars' Las Vegas segment reached 94% during the quarter, and the company broke quarterly records for hotel revenue, hotel profit, and gaming revenue. 

But while revenue soared, so did utility expenses. The company normally operates at a 48% to 49% profit margin, but in Q3, its profit margin only reached around 35%. A combination of high utility expenses and construction interruptions contributed to that drop in profitability.

Caesars Digital, the company's digital sportsbook and online casino, enjoyed a remarkable 121% revenue increase in the third quarter. While it was still unprofitable for the quarter, its net loss was much smaller than last year's and reflected strong year-over-year improvement for the digital segment.

As for Q4, Caesars CEO Tom Reeg called October "the strongest month in the history of Las Vegas for Caesars."

How do the two companies differ?

On the surface, both MGM Resorts International and Caesars Entertainment share similar business models. Both operate a robust portfolio of casinos and resorts worldwide, and both offer a digital gambling and sportsbook option. However, there are subtle differences between the two. Caesars, for example, is known for plentiful luxury shopping options on its properties. MGM, meanwhile, has a better hold on the flourishing online sportsbook market. 

The self-titled "King of Sportsbooks," MGM has emerged as a leader in this space. Considering rapid adoption and popularity of online sports betting, MGM Resorts International should have a bright future taking this industry forward. Currently a more passive participant in the online sports betting revolution, Caesars might not benefit as substantially. 

Which stock is a better buy right now?

Based purely on revenue, a stock's price-to-sales ratio can indicate whether a company is undervalued or overpriced -- the lower the ratio, the better.

Table data: E*trade, company reports.

Although Caesars Entertainment has a slightly lower price-to-sales ratio, I think MGM stock makes the better buy at this point, due to its leadership role in the online sportsbook game, ever-present marketing efforts, and significantly larger market capitalization.

However, both of these casino stocks look to be gaining steam as the world wakes up from its COVID slump. Considering Caesars stock is down nearly 60% from its 2021 highs, it could also represent an extremely opportunistic buying opportunity for long-term investors.