Will Macau Recovery Help Drive MGM Stock Back To $50?

MGM Resorts stock (NYSE:MGM) currently trades at $41 per share, roughly 19% below its pre-inflation shock high of $50 seen on March 17, 2021. The stock has been impacted by the Macau operations, which saw business largely collapse over 2021 and 2022, due to stringent Covid-19 restrictions which hurt tourist inflows into the region. Now things have recovered strongly in Macau in recent quarters. Tourist arrivals into Macau increased by 79.4% to 8.88 million for Q1 2024, approaching roughly 86% of pre-pandemic levels. Moreover, spending has also picked up and MGM is seeing strong pent-up demand. Market-wide mass gaming revenue for Macau reached about $5.9 billion for Q4 2023 (or roughly 105% of 2019 levels). MGM stock was trading at just about $29 in June 2022 and has jumped about 42% from these levels to almost $41 due to improvements in Macau and strength in the company’s Las Vegas operations.

Looking over a slightly longer period, MGM stock has shown strong gains of 35% from levels of $30 in early January 2021 to around $40 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. However, the increase in MGM stock has been far from consistent. Returns for the stock were 42% in 2021, -25% in 2022, and 33% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that MGM underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the mega-cap stars GOOG, MSFT, and AAPL.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MGM face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Returning to the pre-inflation shock level means that MGM stock will have to gain about 23% if the stock recovers from $41 currently to its pre-shock highs of $50 per share. While the stock may recover to those levels, we presently estimate MGM valuation to be around $47 per share, about 15% ahead of the current market price. While we believe that MGM could see gains, we think that the upside for the company in the near term could be limited by concerns about the global economy and a potential slowdown in consumer spending. Our detailed analysis of MGM Resorts upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: An increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.
• Since August 2023: the Fed has kept interest rates unchanged to quell fears of a recession, with rate cuts expected in 2024.

In contrast, here’s how MGM stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

MGM Stock and S&P 500 Performance During 2007-08 Crisis

MGM stock declined from nearly $93 in October 2007 to $3.50 in March 2009 (as the markets bottomed out), implying that the stock lost over 95% of its value through the drawdown. However, the stock rebounded to over $9 by early 2010, an increase of about 160%. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach 1,124.

MGM Fundamentals Over Recent Years

MGM revenues stood at just $5.2 billion in 2020 as the spread of COVID-19 impacted gaming and hospitality-related revenues. The number recovered to $9.7 billion in 2021 and stood at $13 billion in 2022, as a recovery in the U.S. was partly offset by weakness in Macau. Revenue rose further to $16.2 billion in 2023. While the company posted a loss of -$2 per share in 2020, earnings have improved since then to $3.39 per share in 2023. MGM had a cash position of about $3.7 billion as of the most recent quarter, with its total debt standing at $6.4 billion.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, MGM stock has the potential for gains once fears of a potential recession are allayed.

[1] Returns as of 5/19/2024
[2] Cumulative total returns since the end of 2016

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