Las Vegas Renovations And Digital Expansion Will Deliver Mixed Results

Key Takeaways

• Strategic investments in digital infrastructure and content development aim to boost digital revenues and margins, particularly through BetMGM and LeoVegas.
  
• Renovations at Las Vegas properties and digital expansion in Europe and Brazil indicate a focus on improving revenue yields and market share growth.
  
• MGM Resorts faces financial strain due to decreased Las Vegas revenues, renovation impacts, competitive pressures, high costs, and possible increased taxes.

Catalysts

Through its subsidiaries, operates as a gaming and entertainment company in the United States, China, and internationally.

• MGM Resorts International expects growth in BetMGM's net revenues from operations to reach between $2.4 billion and $2.5 billion in 2025, with EBITDA turning positive, which could imply increased earnings in the future.
  
• Strategic investments in digital infrastructure and proprietary content development, especially significant capital spend in BetMGM and LeoVegas, suggest a push towards enhancing digital revenues and margins.
  
• The ongoing renovations at several Las Vegas properties, including MGM Grand and Bellagio, signal potential for increased room rates and higher revenue yields as these enhanced facilities attract more high-value guests.
  
• The expansion of MGM's digital segment, particularly in Europe and Brazil, and the integration of TIPICO's U.S. technology, illustrate a strategic focus on extending digital market share which could bolster future revenue growth.
  
• Successful capital management strategies, such as aggressive share buybacks driven by current share valuations, are expected to contribute to EPS growth as cash flow per share accelerates.

MGM Resorts International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on MGM Resorts International compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming MGM Resorts International's revenue will decrease by 0.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 4.3% today to 3.8% in 3 years time.
• The bearish analysts expect earnings to reach $659.1 million (and earnings per share of $2.35) by about April 2028, down from $743.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.6x on those 2028 earnings, up from 11.5x today. This future PE is lower than the current PE for the US Hospitality industry at 21.5x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

MGM Resorts International Future Earnings Per Share Growth

Risks

• Las Vegas operations experienced a 6% decrease in revenues and an 11% decrease in adjusted EBITDAR for the fourth quarter compared to the previous year, which are negatively impacting the overall earnings.
  
• The impact of the renovation project at MGM Grand is significant, with an expected adverse effect on revenues for a period similar to that of the Super Bowl impact, implying near-term financial strain.
  
• There is a potential challenge from increased competition in digital markets like Brazil and expanded into new international markets, which could pressure revenues and profit margins from new investments.
  
• High operational costs and measures, such as the increase in ADR (Average Daily Rate) in Las Vegas, need to be offset in a flat demand environment to maintain revenue growth.
  
• External factors, such as potential tax increases on digital and land-based gaming, could add financial pressure by increasing operational costs and potentially reducing net margins.

Valuation

• The assumed bearish price target for MGM Resorts International is $41.07, which represents one standard deviation below the consensus price target of $46.81. This valuation is based on what can be assumed as the expectations of MGM Resorts International's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.0, and the most bearish reporting a price target of just $35.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $17.2 billion, earnings will come to $659.1 million, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $30.28, the bearish analyst price target of $41.07 is 26.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.