Title: MGM's Potential 60% Gain if It Returns to Pre-Inflation Shock Levels
MGM Resorts' shares are currently trading at $32 (as of January 13), approximately 36% below the pre-inflation turmoil peak of $50 seen on November 5, 2021. The stock's downturn can be traced back to Macau's operations, which took a significant hit due to stringent Covid-19 restrictions, resulting in a decrease in tourist inflows to the region. However, Macau has shown a remarkable comeback in recent quarters. It recorded a record-breaking third quarter, driven by robust mass market growth and an exceptional Golden Week performance, surpassing 2019 levels by 20%.
MGM China witnessed a 14% increase in Q3 net revenues and a 5% rise in adjusted property EBITDAR, leading to a margin of 26%. The stock was priced around $28 in June 2022, and since then, it has gained approximately 16%. While the stock may climb back up to its pre-shock highs, our analysis suggests an estimated valuation of around $42 per share, around 30% ahead of the current market price.
Despite this potential growth, concerns about the global economy's sluggishness and possible decrease in consumer spending could limit MGM's upward trajectory in the near future. To better understand MGM Resorts' upside following the inflation shock, you can refer to our detailed analysis from 2022.
Furthermore, if you're seeking a less volatile option with better returns, look into the High Quality portfolio, which has consistently outperformed the S&P 500, recording over 91% returns since its inception.
MGM's stock performance has been anything but consistent over the last 4 years, with annual returns exhibiting significant volatility in contrast to the S&P 500. While the stock saw a 42% return in 2021, it faced a 25% decline in 2022, bounced back with a 33% increase in 2023, and took a 22% hit in 2024. In comparison, the High Quality Portfolio has displayed less variability, making it a more reliable investment choice.
Inflation Shock Timeline
The inflation shock underwent several phases:
- Early 2020 - 2021: An increase in money supply to mitigate lockdown effects led to high demand for goods, with producers being unable to keep up.
- Early 2021: Shipping bottlenecks and worker shortages from the coronavirus pandemic continued to affect supply.
- April 2021: Inflation rates surpassed 4%, subsequently escalating rapidly.
- Early 2022: Energy and food prices surged due to the Russian invasion of Ukraine, and the Fed commenced its rate hike process.
- June 2022: Inflation levels peaked at 9%, marking a 40-year high. The S&P 500 index experienced a more than 20% decline from its peak levels.
- July - September 2022: Aggressive rate hikes by the Fed resulted in an initial S&P 500 recovery, followed by another sharp decline.
- October 2022 - July 2023: The Fed continued the rate hike process and witnessed improvements in market sentiment, allowing the S&P 500 to partially regain its losses.
- Since August 2023: The Fed maintained interest rates steady to curb recession fears, switching to rate cuts by the 2024 year-end, with reductions of 0.5%, 0.25%, and 0.25% in September, November, and December 2024, respectively.
MGM Resorts' total revenue, including the contributions from MGM Resorts and MGM China, saw a decrease during the periods of stringent Covid-19 restrictions in Macau. However, MGM's valuation, based on the analysis conducted in 2022, suggests an estimated revenue of around $42 per share, indicating potential growth for the company.
