MGM Stock Has Goods to Weather Macau Storm

Posted on: August 29, 2022, 02:00h. 

Last updated on: August 29, 2022, 02:01h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

By way of its 56% stake in MGM China, MGM Resorts International (NYSE:MGM) is exposed to slumping Macau. But the stock has the ingredients to endure ongoing turbulence in the largest Asia-Pacific casino hub.

MGM stock
People watch the show at the Bellagio on the Las Vegas Strip. Some experts say MGM stock could generate upside. (Image: BuzzFeed News)

Shares of the largest operator on the Las Vegas Strip shed a quarter of their value year-to-date — a performance that could be reflective of multiple factors. First, some market participants may be factoring that Macau’s gross gaming revenue (GGR) may not show any sign of improvement until 2023.

Second, and arguably, more important, other investors could be assuming soaring interest rates and persistently higher inflation, among other factors, will sap the US economy. That would be an obvious headwind for domestic casinos. Still, some experts believe MGM stock offers upside potential — regardless of Macau.

Investors used to buy companies like MGM, which owns casinos in Macau, for their exposure to the fast-growing Asian gambling hub,” reports Jacky Wong for the Wall Street Journal.  “But they can now probably buy the company despite its Macau exposure, given its strong domestic performance.”

MGM China is resisting significant investments in the special administrative region (SAR) for the time being. Fortunately, MGM has more outlets for offsetting China’s risk than the other US-based firms.

Plenty of Non-Macau Reasons to Like MGM Stock

There was a time when MGM was a more direct bet on Macau. Previously, the aforementioned stake in MGM China represented as much as a third of the Bellagio operator’s market capitalization. But that’s down to about 8% today, according to the Journal.

Obviously, that’s a symptom of the China unit’s declining market value, but also a sign investors are prioritizing catalysts such as vibrancy on the Las Vegas and BetMGM. The operator’s digital gaming arm, BetMGM, is the biggest internet casino name in the US, and one of the top online sportsbook operators. Importantly, that business is likely to turn profitable in 2023.

The iGaming and online sports wagering business is a potential second-half catalyst for MGM shares in its own right. That could prove to be the case if the operator keeps a lid on promotional spending through football season, and capitalizes on the recent legalization of sports wagering in Massachusetts.

Additionally, MGM reported second-quarter Strip occupancy rates north of 90% — a figure that could increase in 2023 as more convention and meeting business returns to Las Vegas.

Financial Factors Favoring MGM Stock

Indeed, a recession is likely to pressure casino equities and other consumer cyclical names. There’s no two ways about that.

“The record-breaking winning streak will probably end, and a recession will dent casinos’ revenue—but shares have also priced in much of these risks. Companies with exposure to the fast-growing online gambling market are even more attractive,” according to the Journal.

In MGM’s favor, particularly if economic contraction sets in, are its sturdy balance sheet and shrinking shares outstanding count — two traits investors could prize if the US economy withers significantly.