Why Melco Crown Entertainment Stock Has Crashed 31% in 2014

Source: Melco Crown.

Most Americans think of the casino industry as being centered in Las Vegas, and the aptly named Las Vegas Sands (LVS -0.37%) and Vegas stalwart Wynn Resorts (WYNN -1.78%) both support that impression. Yet for years now, most of the growth in the global gaming industry has come from Asia; in particular, the Macau area of China has produced immense profits for casino companies with operations there. Although Las Vegas Sands and Wynn both have a presence in Macau, Melco Crown Entertainment (MLCO 1.13%) is a purer play on the former Portuguese colony's growth prospects as a gaming center and on growth throughout Asia.

Melco Crown saw its shares soar in the five years following the financial crisis, as many investors who had written off the Asian casino industry as a flash in the pan were surprised to discover Macau bouncing back convincingly in the recovery. Until early this year, Melco Crown had been one of the biggest winners in gaming, with a gain well in excess of 1,000%. Yet concerns about whether Macau has any growth left have hit the stock hard in 2014, and longtime shareholders aren't sure whether to stick with a winning bet or get out while the getting's good. Let's take a closer look at Melco Crown to see whether it can recover from its recent losses.

Stats on Melco Crown

Source: Yahoo! Finance.

What broke Melco Crown's hot streak?
It's important to put this year's drop into context, as Melco Crown had been on a tear coming into 2014. Last year alone, the stock jumped almost 125% as investors looked favorably both on the growth prospects for the maturing Macau market and the company's planned Philippines resort in Manila.

Source: Melco Crown.

This year, though, some of the uncertainties involved in the gaming industry came back into investors' minds, and they threw cold water on Melco Crown's bullish tale. Gross revenue in Macau has fallen off in recent months, and even though trends earlier in the year were much more favorable, fearful investors believe growth in Asian gaming might finally be hitting its limit. Given Melco Crown's greater reliance on Macau for its overall business, it is more vulnerable to problems there than Wynn or Las Vegas Sands. Moreover, even though the company is due to open its Studio City casino on the Cotai Strip next year, Melco Crown has had trouble getting full approvals to maximize the new property's potential in the highest-profile area of Macau.

City of Dreams Manila. Source: Melco Crown.

Can Melco Crown succeed outside Macau?
In order to diversify its portfolio of properties, Melco Crown is making big bets beyond Macau. The most important one is in the Philippines, where Melco has already opened portions of its City of Dreams Manila resort as part of the capital city's efforts to bill itself as an entertainment hub. Melco ideally needs the Philippines to establish itself as a reasonable rival to Macau in order to justify the over $1 billion invested in the resort.

Melco Crown's plans are even more ambitious elsewhere, although they're also at earlier stages. Japan has finally started to consider opening up to gaming ventures, and Melco Crown hopes it can compete against Las Vegas Sands, Wynn, and other industry players if gaming is legalized within the island nation. Given the wealth and attractiveness of the Japanese market, any presence there could have a big impact on Melco Crown's bottom line.

Melco Crown has even considered aggressive, high-risk ventures. A casino in Vladivostok is aiming at visitors coming from the northeastern portion of China, as well as from South Korea and Japan. While far from proven, a Russian casino would give Melco plenty of upside potential if it worked out.

Regardless of the long-term impact of these expansion plans on the stock, Melco Crown will continue to respond in the short term to the fate of Macau and its trends. Staying aware of monthly revenue trends should give you a sense of what Melco Crown is seeing in its home market and whether a reversal in the stock's poor performance will come anytime soon.