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3 Reasons to Buy MGM Shares

Back on March 23, 2020, I invested in Wynn Resorts (NASDAQ:WYNN) based on a belief that the casino industry would bounce back from the pandemic. A year later, I sold my WYNN stock and invested in MGM Resorts (NYSE:MGM) stock.

A photo of the MGM logo on the MGM casino building.
Source: Michael Neil Thomas / Shutterstock.com

I was very fortunate to time the market bottom in Wynn perfectly. However, a year later, I now believe there are at least three reasons why MGM stock is the best casino stock to buy moving forward.

MGM Stock Is a Macau Bet

In the fourth quarter, MGM reported $305 million in revenue from Macau, China. Many Americans consider Las Vegas to be the center of the gambling world. However, Macau is the true global gaming hub. In 2019, the last full year prior to the pandemic, the entire state of Nevada, including Vegas, Reno, Lake Tahoe and other locations, generated about $12 billion in gross gaming revenue.  Macau casinos alone generated $36.7 billion that year.

I’m very bullish on China and its 1.44 billion citizens in the long term. Wynn, MGM and Las Vegas Sands (NYSE:LVS) are among the six casino companies granted licenses to operate in Macau.

Of the three stocks, MGM has the least exposure to Macau. But it still has a significant presence there. MGM stock generated more than 20% of its total revenue in Macau in the fourth quarter.

In February, Macau’s gross gaming revenue was up 136% year-over-year. Yes, that growth number is off compared to pandemic levels. But I see Macau as a massive long-term growth opportunity. I definitely want exposure to that exclusive market.

MGM Stock Is a Vegas Rebound Play

Some of the top-performing stocks so far in 2021 have been so-called economic recovery stocks. The general thesis is that travel and leisure industries that were crushed by the pandemic will experience a boom this year due to pent-up demand.

Las Vegas is a popular vacation destination for all Americans, especially Californians. However, Las Vegas was completely shut down in 2020 due to the pandemic. Many resorts are just now reopening shows and restaurants and returning to 50% hotel and casino capacity.

Analysts expect leisure travel to recover first, followed by corporate travel. Vegas is also a hub for corporate events and conventions. Pent-up demand in leisure travel will likely begin in the first half of 2021. Pent-up corporate demand will come later and spill over into 2022.

In that sense, MGM stock is potentially a reopening stock with legs. The MGM rebound won’t just come in summer 2021. It could potentially last for several more quarters as corporate events return to Vegas.

BetMGM App

Macau is a great reason to own MGM stock. Vegas is also a good reason. MGM’s eight other U.S. regional casinos combine for another good reason. But the biggest reason why I dumped Wynn in favor of MGM stock is the massive and rapidly-growing U.S. online sports betting market.

In May 2018, a New Jersey Supreme Court ruling determined any U.S. state can legalize sports betting. Since that time, legalized sports betting has swept the nation one state at a time.

Morgan Stanley has estimated the U.S. online sports betting market will grow from $833 million in 2019 to nearly $7 billion by 2025. Investors would be hard-pressed to find a bigger growth opportunity anywhere in the market.

To be clear, MGM is not the market leader in U.S. online sports betting. DraftKings (NASDAQ:DKNG) and Flutter Entertainment (OTC:PDYPF) subsidiary Fan Duel are the market leaders. But MGM’s BetMGM and Penn National Gaming (NYSE:PENN) subsidiary Barstool Sports are neck-and-neck for third place in U.S. online sports betting market share, according to Bank of America.

“Sports betting/iGaming could grow +70% in 2021 and another +25% in 2022 and has a strong catalyst path driven by the openings of Michigan, Virginia, Louisiana and Maryland,” Bank of America analyst Shaun Kelley says.

He says BetMGM was the primary reason he upgraded MGM stock from “underperform” to “neutral” in early February.

“Market share gains have been meaningful across operational states, but #1 and #2 share in TN and CO are most impressive,” Kelley says.

How to Play It

I think the U.S. online sports betting market could be a massive long-term growth driver. I wanted a piece of that action. MGM certainly has balance sheet issues, including $12.3 billion in long-term debt. However, MGM stock currently trades at just 9.8 times 2019 earnings and 3.7 times sales. DraftKings wasn’t profitable in 2019 or 2020 and trades at 40.9 times sales.

MGM stock is the most affordable play on U.S. online sports betting. It is also a play on long-term growth in Macau and a bet on pent-up demand for Las Vegas. There are plenty of good reasons to buy MGM stock today.

On the date of publication, Wayne Duggan held a long position in MGM.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.


Article printed from InvestorPlace Media, https://investorplace.com/2021/04/3-reasons-to-buy-mgm-shares/.

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