MGM Resorts stock was facing major decline after the quarterly results were announced. The stock was down by nearly 11.2 percent at $36.8 and had touched intraday low of $36.6 at the time of publication of this report. Morningstar has maintained a BUY rating on MGM Resorts International with a fair value estimate of $52, reflecting potential upside from its current trading price of $41.41 as of October 30, 2024. The analysis underscores MGM’s continued strength in Las Vegas occupancy and growth in Macao gaming, balanced against near-term pressures in digital gaming and high capital investment demands. Although facing increased competition, MGM’s established omnichannel presence and planned expansions in Japan and Macao offer promising revenue diversification and growth avenues. Investors should anticipate moderate volatility due to high operational uncertainty in the Macao market.

Investment Thesis and Price Target

BUY Rating with a Fair Value of $52
Morningstar’s fair value estimate at $52 reflects the analyst's confidence in MGM’s long-term growth potential, notably in Macao and future opportunities in Japan. MGM's current price-to-fair value (P/FVE) ratio at 0.80 highlights its undervalued status, presenting a potentially advantageous entry point for investors.

High Uncertainty but Stable Capital Allocation
The high uncertainty rating emphasizes challenges such as regulatory risks in Macao and competitive pressure in digital gaming. However, MGM's standard capital allocation and steady reinvestment strategies in physical and digital assets signal management’s commitment to long-term growth.

Las Vegas Market Resilience

Occupancy Rates Remain Strong
Despite recent volatility, MGM’s Las Vegas properties continue to achieve robust performance. Occupancy levels in Las Vegas reached 94%, a notable improvement from last year’s 92%, bolstered by high demand and group travel growth. Revenue from Las Vegas properties, including flagship sites like MGM Grand and Bellagio, now accounts for 62% of MGM’s EBITDAR.

Profit Margins Supported by Insurance Proceeds
The Las Vegas EBITDA margin rose to 34.3% in Q3 2024, boosted by a one-time insurance gain. Although margins may face slight pressures due to labor costs, MGM’s projections maintain an anticipated return to 36% by decade’s end.

Expansion and Growth Opportunities in Macao

Macao Market Recovery
MGM's Macao segment, comprising 17% of 2023 EBITDAR, shows renewed vigor as tourism rebounds post-pandemic. Sales in Macao exceeded pre-2019 levels, primarily due to increased visitation and elevated table allocations from regulatory bodies.

Long-Term Moat in Regulated Markets
Although the Macao market is heavily regulated, MGM’s secured gaming license provides a unique growth opportunity. The anticipated expansion of gaming and non-gaming revenues in Macao could drive consistent revenue growth.

Emerging Opportunities in Digital and International Markets

BetMGM Poised for Growth Amid Competition
MGM’s digital sports betting and iGaming ventures through BetMGM—partly owned with Entain—represent a valuable revenue channel. Digital revenues grew by 20% in Q3 2024, and recent product enhancements are expected to drive sustained growth despite competition from DraftKings and FanDuel.

Investment in Japanese Integrated Resort
MGM’s anticipated resort in Japan by 2030, where it holds the only urban gaming license, highlights a promising revenue source. With development costs estimated at $10 billion, Morningstar anticipates the Japanese market could generate 3% of MGM’s EBITDAR by 2031, delivering high returns due to low competition and high demand.

Risk and Uncertainty Considerations

Regulatory and Operational Risks in Macao
The Macao government’s recent regulatory measures, including increased oversight on casinos, present a higher-risk environment. Control over licenses, workforce, and travel restrictions introduces variability in MGM’s Macao performance, affecting revenue stability.

Competition in the US Sports Betting Market
Although BetMGM has expanded its market presence, it faces heightened competition from larger players like DraftKings. As a result, the expected timeline for profitability in digital gaming has extended, potentially impacting short-term earnings.

Capital Allocation and Financial Health

Improved Debt Position
MGM’s capital strategy has focused on debt reduction, with debt-to-EBITDA ratios averaging 2.3 times over the next five years. This strategic de-leveraging supports a sound financial foundation amid high-investment growth initiatives.

Shareholder Value Prioritization
MGM’s shareholder distribution policy has shifted toward stock buybacks over dividends, supporting share price stability. Future allocations are expected to emphasize digital and international market growth, including sports betting and expansion in Japan.

Disclaimer: Investors are advised to conduct independent research or consult with a financial advisor before making any investment decisions.