MGM Stock Earns Tepid View from Morgan Stanley, Bank Points to Sports Betting Risk

Posted on: November 23, 2021, 09:35h. 

Last updated on: November 23, 2021, 05:35h.

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

MGM Resorts International (NYSE:MGM) stock is trading lower Tuesday after Morgan Stanley analyst Thomas Allen restarted coverage of the casino giant with an “equal-weight” rating.

MGM stock
MGM, seen above, stock gets a lukewarm rating from Morgan Stanley analyst, who sees sports betting risks. (Image: MGM Resorts)

Allen, one of the most widely followed gaming analysts on Wall Street, sets a $51 price target on the Bellagio operator, implying an upside of 14.6 percent from the Nov. 22 close. MGM stock is lower by 2.72 percent on Allen’s call, extending a decline that’s seen the shares shed 15.32 percent from the 52-week high set early this month.

The Morgan Stanley analyst adds that while it’s clear BetMGM is setting itself as a top internet casino and online sportsbook operator, there are risks if that business cedes market share to rivals.

MGM has been a beneficiary, with strong stock performance driven by BetMGM gaining share well ahead of expectations,” notes Allen. “However, share has started to fall, and we see risk this continues from increased competition with Caesars spending heavily (and helped by a 60 million+ legacy database vs. MGM 37 million) and Penn National Gaming (24 million database) entering new states.”

BetMGM is a 50/50 joint venture between the casino operator and Entain Plc (OTC:GMVHY). It is the second-largest online sportsbook company in the US behind FanDuel.

MGM Stock Sports Attractive Valuation

While there are risks to consider with MGM stock, Allen says the shares sport compelling valuations. It trades at a price-to-book ratio of 3.06x and 2.71x sales, according to Morningstar data.

Though it craves full control of BetMGM, a potential headwind for MGM was erased after DraftKings (NASDAQ:DKNG) recently ended its courtship of Entain. With BetMGM intact for the time being, MGM doesn’t need to search and dole out capital for a new technology partner, which likely would have happened if DraftKings won Entain.

MGM has long expressed regret that it doesn’t have full control of the iGaming and sports wagering enterprise. It was later rumored that the casino operator was mulling ways to gain that control while DraftKings and Entain were in discussions.

“After reviewing MGM’s third-quarter results, we have increased our fair value estimate to $42.50 per share from $39 to account for stronger demand and profitability across its U.S. assets,” said Morningstar analyst Dan Wasiolek in a recent report. “Our fair value estimate implies an enterprise value/earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) multiple of 7.5 times our 2023 estimate, a year when we estimate travel and leisure demand to reach pre-COVID-19 demand.”

Sports Betting: Opportunity and Competition

Allen’s assessment that iGaming and sports wagering presents both opportunities and risks to MGM investors is spot on. Notably, some analysts believe the big three of FanDuel, BetMGM, and DraftKings cannot sustain their current levels of market share.

That implies those operators are vulnerable to increasing competition. Additionally, analysts and investors are growing leery of the excessive marketing costs it takes to compete in the online sports betting space — a factor weighing on DraftKings, as just one example.

For its part, MGM has deep pockets and one of the biggest cash stockpiles in the gaming industry. It stands as one of the most obvious beneficiaries of expanded sports wagering, which Morningstar forecasts will reach 40 states or more by 2024.