With cases of Covid-19 rising across the U.S., and tourism likely the last industry to recover from the worldwide pandemic, investing in MGM Resorts International (NYSE:MGM) is a roll of the dice.
While MGM stock got a bounce when Las Vegas officially reopened to the public in June, any enthusiasm for gambling, live entertainment and buffet meals was likely short-lived as the number of Covid-19 cases has reached record levels across the U.S, Further, more than half of Americans say they are unwilling to travel at this time, especially for leisure and vacations.
MGM stock has recovered from the low of $7.14 a share to which it fell on March 18. But yesterday’s closing price of $16.71 per share is still more than 50% lower than where the stock had been trading prior to Covid-19 wreaking unprecedented havoc.
That’s a tough blow to MGM Resorts, which is a leader in the hotel and casino sector that helps to anchor the $2.9 trillion global tourism industry. Yet MGM Resorts, which owns hotel and casino properties in Las Vegas, Michigan, New York, New Jersey, Mississippi and Maryland, along with several properties in China, is feeling the brunt of the pandemic’s impact.
The travel and tourism industry is arguably the sector of the economy that’s been hardest hit by the pandemic. The U.S. Travel Association is forecasting a $910 billion downturn in the travel industry this year. That would be seven times worse than the impact of the 9/11 terrorist attacks.
Missing Sports Betting, Too
In addition to the loss of foot traffic at casinos and a lack of revenue from live shows, MGM Resorts is also losing significant revenue from sports betting. With all major professional and amateur sports on hiatus until later this summer, the funds generated from sports betting have all but dried up. In recent months, MGM Resorts’ properties such as the Bellagio in Las Vegas have been reduced to taking bets on the few sports still taking place around the world, including Korean baseball games and German soccer matches.
And taking bets on those sports has proven to be problematic. A recent technical glitch cost the Bellagio casino $250,000 after an error allowed gamblers to place winning wagers on baseball matches after they had already started being played in Korea. The costly error seems to underscore the point that nothing seems to be going right for MGM Resorts this year.
In good times, Americans spend billions of dollars placing bets at casinos in Las Vegas, Nevada and Atlantic City, New Jersey, where sports gambling is legal. In 2019, Nevada handled a total of $5.32 billion of sports bets, and the majority of that money was spent by tourists who flew into Las Vegas from all over the world. With so much money spent gambling on major events such as the Super Bowl, March Madness college basketball tournament and hockey’s Stanley Cup playoffs, sports can’t return soon enough for MGM Resorts and its signature casinos such as the Luxor, Mandalay Bay and MGM Grand.
Indeed, MGM Resorts has sought to reposition itself in recent years as a gaming, sports and entertainment company. It’s taken steps to divest many of its signature properties, including the MGM Grand resort, in order to become what the company calls an “asset light” casino operator. Last October, the company agreed to sell its Bellagio resort to Blackstone Group (NYSE:BX) for $4.25 billion. Under the terms of the deal, MGM will continue to manage the Bellagio after the sale to Blackstone is finalized.
China Exposure
It’s not just the U.S. where MGM has faced trouble due to the Covid-19 pandemic. The company is also heavily exposed to China, as it has major resorts in Shanghai, Cotai and the country’s Macau gambling hub.
In fact, 23% of MGM’s revenue last year came from its operations in China. With strictly enforced lockdown measures in place throughout China for much of the first quarter of the year , MGM Resort’s China division reported a 63% decline in net revenue in Q1. As a result, China’s contribution to MGM’s total revenue sank to just 12% in Q1.
And in May, Macau was open, but its monthly gambling revenue was down 93% year-over-year. The fact that tourists are required to undergo two weeks of quarantine upon entering the city has kept many visitors away from the gambling center. Further complicating matters, concessions to operate in Macau are coming up for renewal soon, and many analysts say those concessions could be used as a bargaining chip by the Chinese government for political maneuvering with Washington, D.C.
The Bottom Line on MGM Stock
At its current price, MGM stock may attract bargain hunters and risk takers. Some people may think that MGM stock can climb to nearly $35 per share, where it was trading before the stock market collapsed in March. But given the current challenges facing the company, there is no guarantee that MGM stock will be able to get back to its 52-week high. MGM CEO Bill Hornbuckle has said that Covid-19 has had “a significant negative effect on our business,” and cautioned that it is going to take a long time before the company returns to its pre-Covid-19 levels.
Analysts seem to agree that it will be difficult for MGM stock to recover in the near-term. Among 15 Wall Street analysts, the average 12-month price target for the shares is $20.00, with a high price target of $40.00 and a low price target of $10.00.
The analysts’ average rating is “hold.” Only two of the 15 analysts recommend buying MGM shares at this time. The bottom line is that MGM Resorts represents too big of a gamble in the current environment. Investors interested in the stock should keep it on their watch list until a vaccine for the coronavirus is widely available and people can once again safely gather in casinos and theaters and at buffet tables.
As of this writing, Joel Baglole did not own any shares of the aforementioned securities.
