The entertainment and leisure industry has a great many categories and domains to choose from, as an investor. The casino sector is an area that many investors show a preference for, given the high returns it typically offers. Contrary to popular belief, casino companies like MGM Stock do a lot more than the running of casinos. Such companies also operate resorts, racetracks, and skiing facilities across the globe. More recently, online gambling has been a growing phenomenon that has grown significantly beyond the anticipation of investors.
As with any economic sector of high promise, investors face a problem: which stock to buy amid all the flashy names? In this article, we present MGM Resorts International (NYSE: MGM), one of the most prominent casino names, which is based in Las Vegas, USA. We have sufficient reason to believe that MGM stands apart from each of its peers in the industry, and is likely to grow the most by 2025. The company has shown a resilience that is yet to be seen amongst entities operating in the casino space. Below, we elaborate upon each of the factors which make MGM such a promising stock to buy now.
The Robust MGM Stock Business Model
MGM Resorts International had historically structured its business by assuming the roles of both owner and operator. It would essentially fully acquire locations that it deemed to be suitable for its hotel resorts or casinos. In the previous years, however, its management decided to take a more capital-lite approach, of only operating these facilities, and hence enjoy a higher return on capital employed. A significant portion of its real estate assets and other facilities had been sold off to the investment management company, BlackRock Inc. (NYSE: BLK). This approach is a major factor that leads us to be confident in MGM’s superior growth prospects by the year 2025.
By running its business model exclusively as an operator MGM stands as having a far more flexible and dynamic business approach, where opportunities for efficiency and higher profits can be fully exploited. The company stands in a better position to expand to areas where it deems strong demand for its services, without the need for capital-intensive investments. On the flip side of this, where specific locations are underperforming and coming at a loss to the wider business, MGM Stock can pack up shop, and reallocate its resources to a more efficient market.
Market-Specific Factors
Another crucial factor that plays into our assessment of MGM is where it positions itself in the broader casino and resort market:
I. MGM’s Macau Exposure
We begin discussions with its exposure to the Chinese city of Macau, which is said to be the casino hub of the east. Macau has been a weak point for MGM, as well as for every major casino player with operations there. With strict restrictions on Covid-19, the industry there had all but come to a standstill.
In late June 2022, MGM price saw a 5% jump, following news of relaxation of some Covid-related restrictions in China, including in Macau. On-arrival quarantine, which was initially 21 days, had been reduced to a mere 7 days. Although not ideal, it did prove to be a sign of progress towards normalcy, which rallied market bulls.
To add to the challenges facing MGM’s Macau division, Chinese authorities have increasingly been taking a harsh stance against gambling. This is not due to moral factors, as is typically the case in China, but rather due to substantial capital outflows to the parent countries of these companies. They have chosen to tackle this with heavy ‘gaming taxes’ on casino companies. MGM has deliberately kept its exposure to Macau minimal, compared to its much larger peers. As per its recent annual report, the region brought in a mere 7% of its total revenue, whilst resulting in a negative EBITDA. Exposure to this degree is minimal yet strategic. The company remains open to opportunistic changes in the Macau market as a result. Moreover, given its capital-lite structuring, it would be able to respond quickly to a more conducive business environment in China.
II. Booming Financials from Las Vegas
MGM’s primary business exposure is within the Las Vegas business strip, where it dominates the market. With the easing of Covid-related restrictions, the casino industry had seen an incredible boom in recent quarters. In MGM’s second-quarter results for 2022, the company had seen its basic EPS shoot up to $4.24, from the prior year’s figure of $0.14. This reflected an almost 3000% jump in EPS, which is not a number we typically expect companies to achieve. However, a significant portion of this jump was attributable to the deconsolidation of MGM Stock Growth Properties. Despite this, revenue in MGM’s second quarter amounted to an impressive $2.14 billion. This had even surpassed the company’s pre-Covid, 2019 figure by an impressive $700 million.
III. Regional Assets
Regional assets have always been the money-maker for MGM. These regional business units situated across the United States, add the resilience factor to its stock. Business in this segment of the company has always been the most stable, given relaxed state taxes, and a lower regulatory grip. The segment makes up a third of the company’s business in terms of sales and EBITDA. It manages to achieve such output, despite low capital allocation, given the high-profit margins associated. In the Las Vegas business strip, leisure and tourism-related factors deliver low-margin earnings which are exacerbated by high taxes and regulatory inefficiencies.
MGM’s Savvy and Aggressive Top Management
A final point of strength, which sets apart MGM from other key players in the world of casinos is its savvy and aggressively smart top management. They have a thorough understanding of the dynamics of the entertainment industry and have been pivotal in the company’s entry into digital casino gaming. When companies grow to a significant scale, the leadership more-or-less tends to take the form of a bureaucracy, unable to take on dynamic decisions. This has not been the case for MGM. The management has taken bold steps in the past to ensure financial sustainability, even in cases where the company’s stock price has suffered in the short term.
The move to shift from an owner-operator to solely an operator, for a more capital-lite approach had been spearheaded by its management. Going against industrial norms is not commonplace in the world of casino companies. Yet, the economic shifts following Covid-19 and macroeconomic headwinds enabled its management to make dramatic changes. It is precisely these tough decisions that make us confident that it is MGM that will lead far above its competition, in terms of growth by 2025.
Risks
Despite our optimistic view toward the MGM Stock growth trajectory in the coming years, it is important to note the few risks that the company remains exposed to. For one, Covid-19, although well within control, through vaccines and treatments, has proven quite unpredictable in the past. If the virus sees a resurgence through a new variant, which would entail lockdowns, MGM could suffer quite dramatically as a result. This is because its primary business takes place at onsite locations. The company’s remote services such as online game gambling are still not in a position that enables it to sustain the business on its own, in the case of lockdowns.
In addition to Covid-19, the emerging monkeypox scare could also spell disaster if its spread does not come under containment soon enough. This holds the potential to completely disrupt leisure and tourism in both Las Vegas and Macau. Both these areas, with the former being especially crucial to MGM’s financial sustainability, are tourist hotbeds, and ideal grounds for the spread of the condition. Health risks such as this are the greatest threat to MGM’s growth trajectory. As long as these remain under control, the stock is likely to see an uninterrupted rise.
Conclusion
In the world of casinos, MGM stands as the one stock that has it all. It holds a robust business model, which enables it to capitalize on profit opportunities without incurring significant costs. Its positioning in the market, which it has deliberately and strategically set, has contributed to its performance boom. The stock also remains highly resilient, given its exposure to the safer, regional markets, making it ideal to buy amid the fears of a looming recession. As a cherry on top of all these core strengths, MGM stock has an extremely competent management team, that has proven time and time again, that it is not shy to take bold, but necessary steps to ensure financial sustainability.
