Will A Potential Entain Deal Drive A Rally In MGM Stock?

Recently, MGM Resorts (NYSE: MGM) made an offer to acquire Entain plc at 1,383 pence per share for a value of just over $11 to expand its presence in the global sports betting and iGaming industry. Per its Q3 2020 earnings report, MGM targets a 15-20% share of the U.S. sports betting and iGaming market ^[1]. And the acquisition move is aligned with this long-term plan.

However, Trefis believes that a potential Entain deal is unlikely to drive a stock surge anytime soon. This is because shares of the integrated resort operator have completely recovered to pre-Covid levels primarily due to its presence in the sports betting industry through BetMGM. In sharp contrast, MGM’s immediate competitors, Las Vegas Sands and Wynn Resorts, have seen their stocks lag the broader markets since January 2020 due to headwinds in Macau and Vegas. Another factor reinforcing our belief is that MGM’s $6.4 billion gain in market capitalization since August 2020 is similar to Penn National’s $6.5 billion market cap gain over the same period. Penn National is also looking to follow a similar growth trajectory as MGM over the coming years and has reported a string of acquisitions to strengthen its presence in the sports betting and iGaming market.

We highlight the historical trends in MGM Resorts’ revenues, earnings, and stock price in an interactive dashboard analysis, Why MGM Resorts Stock Has Gained 22% Between 2018-End And Now?

Comparing MGM Resorts gains with Penn National Gaming

In 2019, MGM Resorts generated $13 billion in total revenues, with a 50% contribution by the gaming segment. As the company’s properties are primarily located in the U.S. with a diversified product portfolio, including table games and slots, its top-line growth has remained sluggish in the past few years. Therefore, the budding sports betting industry is a strong revenue and earnings opportunity for the company.

According to recent filings, MGM Resorts targets a 15-20% market share in the sports betting and iGaming market. Considering a similar market share for Penn National Gaming, as highlighted in our earlier analysis, its stock has gained $6.5 billion in market capitalization since August 2020. Thus, we believe that the $6.4 billion surge in MGM’s market capitalization, which has also resulted in the stock’s full recovery to pre-Crisis level, is driven by investors expecting the company’s expansion in the sports betting industry. Thus, we believe that the consummation of Entain acquisition is unlikely to drive further gains in MGM stock.

Overview of Sports Betting Industry

After the Supreme Court overturned the Professional and Amateur Sports Protection Act (“PASPA”), the sports betting and iGaming industry went live in 25 states. Currently, Nevada, New Jersey, and Pennsylvania account for almost 75% of sports betting handle. At maturity, the sports betting & iGaming industry is likely to reach $40 billion in the U.S. and $70 billion globally. Thus, multiple sports betting applications, including Fanduel, bet365, HardRock Café, BetMGM, and William Hill, are eyeing a sizable share of the pie.

MGM’s revenues are poised to grow strongly, but its stock seems to have already priced in this fact. If you are looking for a growth portfolio, here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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1. Q3 2020 Earnings Presentation [↩]