The Parisian in Macau, the latest project from Las Vegas Sands. Image: Las Vegas Sands.

If you build it, they will come.  

In many ways, that's the motto of the gaming industry. Build a massive new casino and people will travel great distances to enjoy the luxury and leave their cash at the tables. In Macau, those people came in droves -- until the party stopped about a year ago.

Whether you want to blame the Chinese government's crackdown on corruption, a weak Chinese economy, or some other confluence of events, you can't deny that gaming revenue has been crushed in Macau. The problem for industry moguls like Steve Wynn, of Wynn Resorts (NASDAQ:WYNN), and Sheldon Adelson, of Las Vegas Sands (NYSE:LVS), is that they're basically just along for the ride.

What goes up must come down
The explosion of gaming in Macau was in many ways unsustainable. Gaming revenue grew by 50%-100% annually over the past decade, a rate that had to come down at some point. At its peak, Macau generated seven times as much gaming revenue as the Las Vegas Strip.

Data: Macau Gaming Inspection and Coordination Bureau. Chart by the author.

But the fall of gaming revenue occurred faster than anyone could have expected, and it came at a time when the industry is set to expand in the Chinese special administrative region. The question now is whether Macau's new resorts will cannibalize existing sites or if the new buildings will attract new visitors. It's a "chicken or the egg" question for Macau's gaming moguls. 

Wynn Palace is due to open in mid-2016. Image: Wynn Resorts.

New resorts present a challenge for Macau
Adelson has long been a believer that supply drove demand in Macau. That might sound a little crazy, but his point was that more resorts, entertainment offerings, restaurants, shopping, etc., would attract more visitors. For a while, that theory seemed plausible.

Today, gaming is shrinking even as all six gaming operators are building new resorts in Macau, so that theory is being put to the test. Melco Crown (NASDAQ:MLCO), MGM Resorts (NYSE:MGM), Wynn Resorts, and Las Vegas Sands will all open new properties in the Cotai region of Macau within the next two years. If gaming expands as much as supply does, these resorts could be a big boost to industry profit.

But the gaming giants are counting on an expanding pie in Macau to be divvied up among the new resorts. Whether the pie really expands is likely up to the Chinese economy and regulators, not to how beautiful the new resorts are. In that respect, the future success of Macau gaming operators is largely out of the control of the gaming companies themselves.

Hanging on for the ride
The decline in Macau gaming has hit Macau gaming stocks hard, but I think the market is starting to stabilize at a "new normal." From here, we should see a slow and steady rise in revenue, both on and off the gaming floor, as Chinese gamblers gain more wealth and new resorts are built.

For investors with a long time horizon, Macau still holds plenty of potential, and over the long term it should generate a lot of profit. But it could be a bumpy ride, and the rise or decline in gaming stocks is largely out of the companies' control.