Las Vegas welcomed a record number of visitors in 2014 at over 40 million people coming to Sin City. After a few years of struggle following the market crash of 2008, the Las Vegas economy finally looks to be on the other side of recovery.
So, with total gaming revenues in the city nearing their 2007 peak, and more new resort attractions being built in Vegas, many investors have started to bet on Las Vegas again, and on companies like MGM Resorts International (NYSE:MGM), which is the biggest player there. Even smaller players there, like Wynn Resorts (NASDAQ:WYNN) , which has most of its global revenue coming from China, are still getting a boost from Las Vegas regrowth. But we saw the crash happen once, just a few years ago, and the profit wiped out with it is still fresh on many investors' minds. Is this Las Vegas recovery sustainable? Thanks to diversification with more focus on non-gaming entertainment, business and convention use, and international visitors, it looks like it will be.
Crash and burn
The Mirage resort and casino's opening in 1989 was the start of an era of rapid growth in Las Vegas. Fast-forward to 2007, when Las Vegas made the most annual gaming revenue it had ever made at nearly $7.5 billion. Then the U.S. recession of 2008 hit, and consumers took fewer vacations and spent less. Over the next two years, the Las Vegas economy lost more than 20% of its revenue.
Las Vegas started to recover after that, and annual gaming revenues have grown slightly each year since 2010, with 2014 estimated annual gross gaming revenues (final numbers for December are not in yet) just below that 2007 peak. Even though it has taken longer than most other industries, the Las Vegas economy seems to be back on track, and in a new form that looks better than before.
The new Sin City -- more ways to have fun
MGM and Wynn have finally started to report rising revenues and profits for their U.S. operations again thanks to the Las Vegas rebound. But while the recovery of gaming revenue specifically has been helpful, it's not gambling that is making Vegas a better, and more sustainable, bet now. Because the city and the casino companies here are now much more focused on non-gambling sources of revenue, and visitors from outside of the U.S., the new Vegas is better than the old for both visitors and investors alike.
Gambling regrowth is only one small part of the overall Las Vegas recovery. In 2014, gaming only accounted for just more than one-third of the total revenue for the major casinos on the Vegas Strip. That is the lowest percentage of total revenue that gambling has accounted for in Vegas' recent history. The biggest increases in percentage of overall revenue for the main casinos on the Las Vegas Strip come from other segments like dining, hotel rooms, and entertainment, as well as from business and convention use.
Las Vegas visitation for 2014 grew to record levels at over 40 million visitors, which has helped drive these increases in other non-gaming revenue like hotel room revenue. MGM and Wynn have each benefited from rising revenue per available room, or RevPAR, driven by higher occupancy rates. In the most recent quarterly earnings, Wynn Resorts reported a 7.2% increase in Las Vegas RevPAR year over year, while MGM reported a 6% increase.
This time will be different
There's always the chance for another recession, and even though Las Vegas has survived a few macroeconomic drops already, investors would prefer that the recovery this time around is more sustainable than before. With diversified income and the portion of international visitors continuing to grow, Las Vegas is likely to be much more stable in the coming years.
Other than the decreased reliance on gambling and increase in non-gaming revenue stated above, Las Vegas has also become a hub for companies and large conventions to use the meeting spaces there. Even if individual consumers cut back on Vegas vacations, large companies will still need space to bring employees from across the country together to meet in one place, and so far Vegas has proved an increasingly good place to do that with over 23 major conventions held in Vegas in December 2014 alone.
MGM is an example of a company jumping on this meeting and convention trend, taking the chance to upgrade its Mandalay Bay Convention Center, currently with 1.7 million square feet of meeting and convention space, by adding an additional 350,000 square feet of space along with other amenities, by early 2016.
Diversification among the types of visitors coming to Las Vegas is another reason the new Las Vegas economy looks more stable. For one thing, Vegas is now much more international, both by visitor base and casino company. In 2013, the total visitor base to Las Vegas was made up of around 20% international visitors, the highest rate of international visitors yet. When 2014 Las Vegas visitor stats are out, I expect that number to continue to trend upward as it has over the past five years.
Additionally, thanks to increased investment from abroad, Vegas is also made up of companies with more international pockets. Such is the case with the coming Resorts World Las Vegas resort set to open in 2016 and built by Malaysian resort company Genting. Having a more international base means Vegas won't be tied only to the U.S. economy if there is another recession at home.
We can only speculate about if and/or when another recession will hit the U.S. economy, but as investors, we would like to think our bets will be resilient and ready if that should happen. Investors betting on Sin City now should do so with some peace of mind knowing that, thanks to more diversification among revenue streams and visitor base, this time around, the Las Vegas recovery should be more sustainable.
Bradley Seth McNew has no position in any stocks mentioned, but supports these companies with frequent Las Vegas visits anyways. Research trips, right? The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.