Casino stocks like MGM Resorts (NYSE:MGM) have been hammered in 2020 as the global pandemic triggered casino shutdowns and travel restrictions. MGM stock is down 34.8% in 2020 along with other major Las Vegas and Macau casino operators.
However, online and sports gambling stocks Penn National Gaming (NASDAQ:PENN) and DraftKings (NASDAQ:DKNG) have been on fire. In the past six months, Penn shares are up 488% and DraftKings is up 292% on high hopes for U.S. sports gambling.
Despite the lackluster market performance, MGM has a big stake in sports gambing as well. But unlike Penn and DraftKings, MGM stock is also a Vegas and Macau rebound play that investors can buy at a discount.
MGM Stock And Sports Betting
In 2018, the U.S. Supreme Court lifted a federal ban on sports betting, essentially opening up a $150 billion industry. As states have legalized sports gambling one at a time, the growth numbers have been very impressive.
In New Jersey, the first state to legalize sports betting, August revenue was up 111.9% compared to July. July revenue was up 90.9% compared to June. These are month-over-month numbers, not year-over year.
“In the U.S., MGM’s 21 casinos are positioned to benefit from an estimated $6.2 billion sports betting market by 2024, generating about 4% of the company’s total revenue that year,” Morningstar analyst Dan Wasiolek says.
MGM has also recently partnered with former Match.com parent company IAC/Interactivecorp (NASDAQ:IAC). IAC took a $1 billion stake in MGM and noted its interest in the potential to leverage MGM’s casinos and gaming apps for sports betting. IAC clearly hit a home run with Match. The fact that it sees a sports betting opportunity with MGM is encouraging.
Bank of America analyst Shaun Kelley says online gambling and sports betting are long-term opportunities for MGM. He says the IAC deal should reassure investors.
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“In our view, this is a clear positive vote for MGM from a highly credible third party, but also for the broader online gaming and sports betting opportunity that we are highly constructive on,” Kelley says.
MGM already offers a BetMGM sportsbook app in which it has a 50% ownership interest.
Macau and Vegas
Most investors would agree that U.S. sports betting is an excellent long-term opportunity. However, it’s the rest of MGM’s business that stands out compared to Penn and DraftKings. MGM operates eight casinos on the Las Vegas Strip, including the Bellagio and MGM Grand. It also operates eight U.S. regional casinos, including Borgata in Atlantic City and MGM National Harbor in Maryland. MGM also has a 55.9% stake in the MGM Macau and MGM Cotai resorts in Macau, China. Macau is the world’s largest gaming destination by total revenue.
There is no doubt the casino industry has been crushed in 2020. As of September, Macau’s gross gaming revenue was down 90% from a year ago. The Las Vegas Strip’s gaming revenue was down 39% in September compared to a year ago.
However, Wasiolek is bullish on Macau’s ability to be a long-term growth driver in a post-pandemic world.
“While 2020 Macau gaming demand will be materially affected by Covid-19, our forecast for annual mid-single-digit visitation growth over the next decade is supported by Chinese outbound travel, which we expect will average high-single-digit annual growth over the next 10 years” Wasiolek says.
He also says MGM has a major longer-term opportunity in Japan, which recently legalized casino gambling. He predicts MGM will open its first Japanese casino by 2026.
A Look at Valuation
MGM has a front-row seat to the U.S. sports gambling boom. It’s also a pandemic recovery play in Macau and Las Vegas. But perhaps the best thing to like about MGM stock is its valuation.
At a share price of under $22, MGM stock trades at just 5.6 times 2019 earnings per share. Sure, it might take a while for MGM to recover all the earnings power it lost during the pandemic. But Vegas and Macau are already recovering. And the stock is undervalued even at 75% of 2019 earnings.
There’s no question MGM stock investors will need to be patient. But don’t chase Penn or DraftKings to wager on a sports betting boom. Instead, bet on MGM stock as a sport betting value play and let it ride.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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. Mr. Duggan 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.