MGM Resorts (NYSE:MGM) stock has doubled since about mid-March, and the market capitalization is currently about $7.7 billion. Keep in mind that this has been a better performance than rivals like Wynn Resorts (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS).
But for the most part, shares of MGM stock have hit a ceiling. What’s more, year-to-date, MGM is down 61.5%.
Therefore, might we see a breakout? Or should investors be cautious right now? Well, in my opinion, I do think the easy gains may be over.
And here’s why.
The Growth Profile Looks Awful
There are certainly positives with MGM. Consider that the company had already been engaged in a restructuring for the past few years. MGM was smart to get liquidity on its large asset base, including properties like the Bellagio, Circus Circus, MGM Grand and Mandalay Bay. Additionally, the company has also been making nice strides in bringing down its debt load.
Another advantage for MGM stock? The cost structure. Note that anywhere from 60% to 70% of the casino expenses are variable. In other words, MGM should be able to lower the burn significantly. In fact, there is nearly $4 billion in cash — and MGM did not even take federal assistance!
However, despite all this, there are other factors that will have a long-term negative impact on the company. And in turn, this will make growth quite challenging.
That said, let’s take a look at some of the reasons why this may be the case:
Economy: Even with the massive stimulus, the economy will likely take time to recover. After all, this is what happened with the financial crisis in 2008 to 2009.
The fact is that there will be a large number of businesses that will not come back — and this will mean lingering unemployment. In such an environment, the lower disposable income will result in muted discretionary spending, such as for gambling and tourism. And even for those people who have jobs, there will likely be much anxiety that will weigh on consumer sentiment.
Consumer Attitudes: According to a survey from Coresight Research, more than 70% of the U.S. population would prefer to stay away from public places. And yes, this is certainly ominous for Sin City.
With that in mind, acting CEO of MGM Bill Hornbuckle is factoring this in his strategy. In a memo to furloughed employees, he noted:
“However, we are realistic in our understanding that domestic and international travel will remain limited for some time. We believe that demand for travel will be significantly decreased for the remainder of 2020 and could continue through the early part of next year.”
Convention Business: This is certainly a key to MGM stock. Last year, close to 16% of the visitors to Sin City were for conventions. But it seems unlikely that this business will return any time some.
In fact, there may be permanent changes, as more companies use video-conferencing services like Zoom (NASDAQ:ZM) and Microsoft (NASDAQ:MSFT) Teams for virtual conferences.
Bottom Line on MGM Stock
All in all, Hornbuckle has done a pretty good job. He also recently provided a comprehensive program for the reopening of the casinos that is based on the advice of health experts. Some of the initiatives include: screening with temperature checks; free access to masks and frequent sanitization; plexiglass barriers; and contactless check-in. And of course, there will social distancing. This will even include minimized drinking on the casino floors.
Such efforts should help build confidence. H0wever, they will probably not be enough for a robust recovery, as traffic will probably be sluggish. In other words, as for MGM stock right now, it’s probably too early for considering a purchase — especially since the shares have already had a strong rally.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
