A high-end room at Wynn Palace in Macau. Image source: Wynn Resorts.
Wynn Resorts (WYNN 1.38%) stock has gained momentum in recent months with some macro trends and exciting announcements from the company helping push the stock up around 30% in 2016. While the stock has looked solid in the last few months, with plenty of promising parts to its outlook, the company certainly faces risks ahead. Here are three reasons the stock could fall.
Further regulation in Macau
While Wynn's momentum in recent months is impressive, it's still a far cry from where sentiment was in early 2014, when Wynn's stock was nearly three times as high as it is now. Most of the reason for the bullish run-up to 2014, the following drop, as well as the recent momentum is Macau. Increased government scrutiny and regulation, including restrictions on tourism and gambling spending on the Chinese-controlled island, slammed Macau's gaming economy and Wynn's stock starting in the summer of 2014.
Things are starting to look much better in Macau thanks to easing restrictions and increased mass-market tourism, which has led to four straight months of year-over-year increases in gaming revenue. November's revenue was a full 14% higher than November 2015, a good sign for what could be a substantial recovery. Still, the risk that the government could at any time implement more regulation or other action to limit gambling activity or casino company earnings hangs over Wynn's stock. We saw this earlier in December when even the rumor of government-mandated ATM withdrawal limits in Macau was enough to send casino stocks tumbling.
Competition in Las Vegas
Wynn's outspoken CEO, Steve Wynn, made headlines in April when he announced plans for overhauling Wynn Las Vegas with a massive clear-water lagoon that will include white-sand beaches and nightly fireworks from an island in the middle of the lake. "Paradise Park," as he called the concept, will also include another 1,000-room hotel overlooking the water and is expected to open in 2019.
A rendering of Paradise Park. Image source: Wynn Resorts.
While this development looks impressive and could certainly lead to new growth for Wynn, the company will be facing intense competition in Las Vegas for potential visitors. MGM Resorts International (MGM 0.99%) is a formidable competitor in providing non-gaming entertainment with more shows and other activities than any other casino company there. Additionally, a new megaresort called Resorts World Las Vegas by the Malaysian company Genting is under construction directly across the Strip from Wynn Las Vegas, and it's expected to open in 2019 as well.
The development will cost an estimated $1.5 billion, so high costs and less-than-expected payback because of competition could certainly be a risk to Wynn's stock when Paradise Park opens.
Another debt downgrade
To fund some of the major developments Wynn has taken on in the last few years, the company has also taken on a considerable new debt load. Wynn's long-term debt currently stands at around $9.5 billion, up from $3.5 billion just four years ago.
Data by YCharts.
While Wynn's debt seems sustainable in terms of interest expense and repaying its loans, it has raised a few eyebrows among analysts -- including ratings company Moody's, which downgraded Wynn based on its debt load. The ratings note from Moody's said Wynn's net debt/EBITDA was simply too high for a higher rating.
If Wynn can increase its EBITDA in the coming quarters, as expected, that should help reduce that ratio. However, Wynn could also need to take on more debt to complete some of its ambitious projects such as Paradise Park, and if this ratio gets worse, and Wynn gets another debt downgrade, that could downgrade Wynn's share price as well.
Wynn Resorts is certainly not a risk-free company, and many of its most important growth opportunities in the next year could prove challenging in the face of the risks above. However, for each of the three risks above, Wynn also has some bright spots to look forward to, such as a turnaround in Macau, a successful development and opening of Paradise Park, gaining control of its debt to get a debt upgrade, and potentially even a dividend increase that could each help Wynn continue on its momentum in 2016 and continue to win going forward.
