Las Vegas has experienced many ups and downs in the last decade. Much like the rest of the U.S. economy, business in Las Vegas was great coming up to 2007 but pretty grim by 2009. Finally, though, it seems Sin City is making a comeback for companies such as Wynn Resorts (NASDAQ:WYNN), Las Vegas Sands (NYSE:LVS), and MGM Resorts International (NYSE:MGM).
What makes investing in Las Vegas unique is the city's resilience as a vacation destination regardless of what is happening in Atlantic City, Macau, Orlando, and elsewhere. Because of that, Las Vegas remains an interesting long-term bet. Here are three things I have learned about investing in Las Vegas.
1. Gambling isn't everything
By gaming revenue alone, Macau surpassed Las Vegas as the new world's gaming hub in 2009. By 2013, the Chinese special administrative region generated about seven times as much gaming revenue as Las Vegas. However, gaming revenue is just the money the companies make from actual gambling. What makes Vegas truly amazing, and has been the highlight of its economic resurgence in 2014, is nongaming revenue in areas such as hotels and live entertainment.
MGM is proving this. Hotel revenue was a major part of MGM's year-over-year net revenue growth in the last two quarters. Higher rates and occupancy at its Vegas properties helped the company become one of the biggest winners in the industry this year.
Hotel revenue growth, as well as increases in retail, dining, and entertainment, are helping companies in Las Vegas catch up to the revenue highs seen in 2007 faster than would be possible with gaming revenue alone.
Now that many companies are keeping their Vegas construction projects focused on hotel renovations, building convention centers, and increasing their nongaming appeal, expect this to be even more important in the years to come.
2. Expansion outside Las Vegas can mean huge wins
If you owned shares of most casino companies in 2007, you were pretty happy as Las Vegas revenues continued to soar. But when the economy crashed in 2008-2009, those shares were hammered. Luckily, many gaming investors had already seen the vast opportunities open to Las Vegas companies that expanded into Macau.
Seeing the trend for massive gains in Macau did not take a magic crystal ball. It was pretty obvious by 2004 that the Las Vegas companies making big bets in Macau might see huge returns in the next decade on the gaming expansion there. All it took was the patience to see it through. But with the Vegas companies that have heavy Macau bets now getting punished by lower gaming by VIPs in Macau, what's the next trend for Vegas companies that want to continue expanding internationally?
Japan looks like a great next option for massive growth, even though the government has been sluggish about legalization of gaming and resorts in the country. Japanese officials discussed legalizing gaming in their country earlier this year, hoping to legalize it in time for the resorts to be open by the 2020 Olympics in Tokyo. It didn't pass, but have patience, it likely will. If that happens, this could provide more massive growth in the next decade for historically Vegas-focused companies like Las Vegas Sands.
3. There are two important types of diversification
It has become apparent over the past decade that Vegas companies do better when they are diversified by across regions and target audiences.
A company that is only focused on the U.S., such as Caesars Entertainment, is probably not a good bet. Macau was a massive winner from 2009 to 2014 while Vegas slowed, but now it appears Vegas will be doing well again as Macau slows. Singapore is starting to look attractive again, and investors are waiting to see what happens with gamling in the Philippines and South Korea. Legalization of gaming in Japan would also have massive impact. Having a portfolio that is diverse across all of these regions, or betting on a company that is expanding in all of these regions, will help in finding the next big winning region.
In Vegas, some companies continue to promote their luxury and high-end hotel rooms, while MGM and others focus more on the mass market by providing lots of entertainment and nongaming options. In Macau, Wynn made massive gains in 2012 and 2013 on high-net-worth players, but was the hardest hit over the summer as the VIP gaming segment in Macau has seen massive declines due to government restrictions on activity by high-net-worth players from mainland China.
Are Las Vegas casino stocks still a good bet?
Buying into these companies looks like a better bet than ever, especially as shares are cheap now after a tough year. Companies such as MGM, which has been winning in Las Vegas, or Las Vegas Sands, which has big potential for more growth in Asia, could produce huge returns in the next few years. As you look at the best way to play these Las Vegas companies, keep these lessons in mind.