With Vegas back in business, is it time to buy MGM Resorts (NYSE:MGM)? MGM stock has more than tripled off their recent lows. While investors have put the novel coronavirus in the rearview mirror, many risks remain.
Initial reports of Las Vegas’ reopening earlier this month could be a bullish sign. Yet, travel demand remains depressed. Vegas-centric names like this one may not recover as quickly as more regional casino plays.
On the other hand, buying right now has its merits. Namely, as uncertainty continues to hang over this stock, there’s still plenty of share price upside if a swift comeback happens.
In that scenario, MGM stock could bounce from today’s prices (just under $20 per share), back to the $30 price level. That’s where it traded pre-pandemic.
Sure, shares aren’t exactly cheap valuation-wise. Considering how everything hinges on a V-shaped recovery that may or may not happen. Nevertheless, the risk/return proposition may be in your favor with this name. In other words, consider this stock a cautious bet on a casino recovery.
MGM Stock Could Climb Higher
With shares moving so fast, so soon, it’s easy to assume much of the upside is already priced into this stock. Granted, the easy money’s already been made in many casino stocks, but that doesn’t mean there isn’t anything left on the table.
As InvestorPlace’s David Moadel discussed June 9, “caution” is the key word with this stock. Analysts remain on the fence whether Vegas can quickly rebound from the coronavirus. With Nevada casinos open at just 50% capacity right now, a “return to normal” remains a work-in-progress.
Yet, this uncertainty may make shares a better buy than casino “hot stock” Penn National (NASDAQ:PENN). Sure, Penn has a strong sports-betting catalyst, courtesy of its partnership with Barstool Sports. They could also see a more rapid comeback, as gamblers opt for Penn’s regional properties, instead of this company’s Vegas destinations.
But, these factors are already priced into Penn’s stock price. In other words, the risk/return proposition may be stronger with a name like MGM stock.
Granted, shares aren’t exactly “cheap” valuation-wise. When comparing enterprise value/EBITDA (EV/EBITDA) ratios, MGM (EV/EBITDA of about 13) is in the middle of the pack. Its current multiple is on par with cross-town rival Caesars Entertainment (NASDAQ:CZR). But, high-flying names like Penn trade at a premium. Not overvalued, but not exactly undervalued, either.
However, I wouldn’t get too hung up on valuation. If a Vegas comeback continues through the year, investors will bid up shares back to pre-pandemic prices.
Sounds like a slam dunk, right? Well, yes and no. There is substantial upside to MGM’s stock price. But, there are also several risks still on the table.
Risks Remain, but May Be Priced-In
The odds may be more in your favor with MGM stock. But, that’s no guarantee shares won’t head lower in the near-term. There are still lingering risks at hand. Firstly, there’s the air travel factor. Credit Suisse analyst Ben Chaiken listed this as one of many concerns with a Vegas recovery.
Until travelers feel safe returning to the skies, a rapid Vegas comeback is going to be a challenge. Secondly, another major concern is the company’s exposure to the convention market. InvestorPlace’s Josh Enomoto brought this up in his June 15 article on this stock.
Not only could it take a long time for convention traffic to “return to normal,” but with businesses pivoting towards virtual meetings via Zoom (NASDAQ:ZM) and other platforms, a much smaller convention industry may become the “new normal.”
That’s bad news for Vegas. And even worse news for MGM, which lacks the level of geographic diversification of its rivals Caesars and Penn National.
Thirdly, if a feared “second wave” comes to fruition, forget about a rapid Vegas comeback. Nevada is already walking back on some of its reopening plans, given cases in the Silver State have seen an uptick.
In short, it makes sense shares hasn’t recovered as quickly as some other casino names. These concerns may already be priced into shares. Buying now, the potential for shares to move higher could outweigh the risk shares retest past lows.
Don’t Bet the Ranch, but Consider MGM Stock a Buy
They may not be out of the woods just yet, but Vegas has decent odds of making a recovery as coronavirus lockdowns come to an end. However, many uncertainties remain on the table. It’s no slam-dunk this Vegas-centric company can quickly recover.
Yet, this may be a reason to buy shares now. With risks more than priced-in, potential share price upside from a recovery trumps these downside risks. Don’t bet the ranch, but consider MGM stock a buy at today’s prices.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
