Osaka And Digital Expansion Will Face Risks Yet Find Upside

Key Takeaways

• Growth in digital and international segments is challenged by rising competition, regulatory risks, high capital commitments, and potential cost overruns impacting margins and returns.
  
• Shifts toward experiential leisure help diversify revenue, but environmental, operational, and consumer behavioral risks threaten profitability and future earnings growth.
  
• Heavy investment in international expansion, limited geographic diversification, and rising operational risks threaten long-term profitability, increase financial strain, and expose MGM to market uncertainties.

Catalysts

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

• While MGM Resorts International is seeing growth in its digital businesses, such as BetMGM’s positive EBITDA turnaround and international expansion into Brazil, the company still faces intensifying competition and potential regulatory disruptions in online betting markets, which could limit growth in digital segment revenues and compress overall operating margins.
  
• Although the company’s strategic partnership with Marriott is accelerating hotel occupancy and has helped achieve record room night bookings, heightened environmental regulations and the possibility of stricter carbon emissions or water usage policies may force MGM to undertake expensive upgrades across its global resorts, raising long-term operating costs and reducing net margins.
  
• MGM’s ongoing investments in high-growth Asian markets, such as the Osaka integrated resort in Japan, position it well for capturing increased global tourism and gaming demand, but large long-term capital commitments, currency volatility in yen, and unforeseen construction or regulatory delays could sharply curtail anticipated international revenue growth and erode future returns on invested capital.
  
• While secular shifts toward experiential leisure spending by younger generations should boost non-gaming revenues—particularly in entertainment, food and beverage, and unique resort offerings—there remains structural risk that increased consumer interest in alternative travel and at-home digital entertainment options could reduce long-term visitation to MGM’s physical properties, thereby impacting total revenues and occupancy rates.
  
• Despite significant operational efficiencies and the ongoing asset-light transition designed to enhance capital returns and free cash flow, MGM’s high fixed costs, leverage from sizable equity commitments, and exposure to labor cost pressures remain as persistent threats to future net income and could limit the pace of earnings growth if macro or industry headwinds persist.

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 0.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 3.9% today to 3.2% in 3 years time.
• The bearish analysts expect earnings to reach $536.4 million (and earnings per share of $1.92) by about May 2028, down from $674.6 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 19.7x on those 2028 earnings, up from 12.8x today. This future PE is lower than the current PE for the US Hospitality industry at 21.9x.
• 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

• MGM Resorts’ large capital commitments for major international projects, such as the Osaka project in Japan, expose the company to construction cost variability, currency risks, and lengthy timelines, which could negatively impact future net margins and constrain free cash flow.
  
• Reliance on the Las Vegas Strip and limited geographic diversification create vulnerability to regional economic cycles, regulatory changes, and disruptive events, increasing the risk of revenue volatility and margin pressure.
  
• Despite digital growth, the increasing popularity of online gambling and alternative travel experiences may structurally reduce demand for physical casino resorts, leading to lower long-term occupancy rates and non-gaming revenues at MGM’s destination properties.
  
• The company’s plans for continued aggressive share repurchases, combined with high fixed costs and substantial new capital needs, could lead to increased leverage and higher interest expenses, putting downward pressure on earnings and restricting investment flexibility.
  
• Growing labor and regulatory pressures—including rising wages, cyber security demands, and potential environmental restrictions—could drive up operating expenses and require costly capital outlays, compressing future profit margins across MGM’s portfolio.

Valuation

• The assumed bearish price target for MGM Resorts International is $35.0, which represents the lowest price target estimate amongst analysts. 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 $59.0, 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 $16.7 billion, earnings will come to $536.4 million, and it would be trading on a PE ratio of 19.7x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $31.74, the bearish analyst price target of $35.0 is 9.3% 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.