MGM Resorts (NYSE: MGM) was a post-pandemic winner because it benefited from the resurgence of America's in-person entertainment venues after the lockdowns and other movement restrictions. However, with Las Vegas gambling near its peak, the company must look to new international markets to pioneer the next leg of long-term growth. Let's explore what the next five years could have in store.
Business is booming
MGM's third-quarter earnings highlight the impressive momentum it has enjoyed since the end of the COVID-19 restrictions. Companywide revenue increased 5% year over year to a record $4.2 billion, helped by the easing of health restrictions in the Chinese gaming hub Macau, which was the last of MGM's major segments to recover past 2019 levels.
MGM has exposure in China through its subsidiary MGM Macau, which partly owns high-profile resorts such as the MGM Cotai and MGM Macau, alongside local partners. It is also the largest casino operator in Las Vegas and boasts a portfolio of regional casino resorts in small and medium-sized cities across the U.S. The company's diversification helps to protect it from weakness in any particular jurisdiction.
What will the next five years have in store?
Although Macau and Las Vegas will likely retain their crowns as the top gaming hubs in the world, both markets are mature, and investors probably shouldn't expect massive long-term growth. While the previous five years enjoyed a post-pandemic rebound, the next five years will probably see casino activity settle to historic norms.
As a discretionary expenditure, the gambling industry experiences cyclical demand based on economic conditions. People will often cut back on this spending when money is tight. And while analysts at Goldman Sachs project a recession probability of only 15% in the next 12 months, this risk could rise over the coming years. With that in mind, MGM's growth could depend on creating new markets.
In April 2023, the company won an official certification to develop a $10 billion integrated resort on an artificial island in Osaka, Japan. As with MGM's Chinese subsidiary, this new resort will be built with the help of a local partner (Orix Corporation), which will likely help with financing and potential local political hurdles. The project is expected to open in 2029, and analysts at Morningstar estimate it could generate a whopping $5 billion in its first year of operation (this number could rise over time).
To put these estimates in context, MGM generated $8.1 billion in revenue in the full year 2023 and will likely split Japanese sales with its local partners. So while this project will be a nice boost to MGM's growth, investors shouldn't expect it to be transformational.
Is MGM stock a buy?
Image source: Getty Images.
The most attractive thing about MGM's stock is its price tag. With a forward price-to-earnings (P/E) multiple of around 14, shares trade at a substantial discount to the S&P 500 estimate of 23. While the casino operator faces slowing sales and a cyclical business model, this discount seems to price in most of these long-term challenges.
MGM also tries to return value to shareholders through a stock buyback program, which has repurchased $1.3 billion worth of stock year to date and reduced shares outstanding by 40% since 2021. This strategy can help boost earnings per share and increase investors' ownership of the company. All in all, MGM's rock-bottom valuation and immense buybacks make shares look likely to rise over the next five years. But don't expect the company to carry your portfolio.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
