DKNG - MGM Resorts: BetMGM First Half Result Adds To Rationale To Buy It Now

2023-07-28 18:25:07 ET

Summary

• MGM Resorts International sports betting revenue has reached $994m for the first six months of this year and is headed toward $2b annually.
• The unit is expected to turn profitable before the end of the year.
• Investors now need to bake in sports betting profits as part of overall rationale to be in MGM stock -- even now.

Earnings call: August 2nd Post-Market

We sense a possible MGM Resorts International (MGM) meet or beat due to sustaining upside in Vegas, recovery in Macau when it reports post-market on Wednesday, August 2nd.

Analysts are looking for $0.54 significantly revised upward from three months ago at $0.12. One year ago, still covid-infected MGM’s YOY earnings were $0.003. While Vegas pent-up demand has slowed a bit, MGM’s regionals are still doing well. But it is the sustaining recovery at Macau that we believe will help drive a beat if there is one.

The bull case for the shares of MGM Resorts International has long been strengthened by the company’s diverse palette of verticals in every key sub-sector of gaming. You have a company dominant on the Vegas strip with a sprinkling of U.S. regional casinos in major markets of the Northeast and other areas for openers. Add its two rapidly-recovering-from-covid properties in Macau. Bake in prospects that it has a better than even chance to win one of three casino licenses up for grabs in Metro New York—the nation’s biggest market.

Above: MGM sentiment should turn more positive as it becomes clear its BetMGM unit will be profitable by year's end.

Even going a step further is MGM’s position as one of the few survivors of a tortured process that began in 2018 when Japan legalized casinos. Since then, a twisted political angst of a process has delayed progression to the first shovel in the ground. MGM and its partner, Japan’s financial services giant Orix Corporation (IX), have won approval to build a $10b integrated casino resort on an island off Osaka.

But the project is still subject to more delays by local political fussing. Eventually, there will be an MGM Osaka, probably by 2030, that will be dramatically accretive to group earnings. We estimate it can do up to $7b in annual revenue. It's far off yet, but signals a determined management on its game.

Investors remain somewhat hesitant about MGM shares despite all these positive goodies already well in hand. MGM has a solid, cash-heavy balance sheet , a first-class management team, and quality properties. Yet the stock has sloshed around in a 52-week trading range between $29,20 (still impacted by covid aftermath) to $51.03. P/E (ttm) 4.79.

One-year analyst consensus target: $56.59. In our view, this is way low due to insufficient consideration of Macau recovery and less Vegas softening than reality suggests . We are staying with our own price target (" PT") of $67 by year’s end. Reinforcing our higher-than-consensus PT are the recent results from BetMGM.

BetMGM on the cusp of becoming earnings accretive

Above: BetMGM has been among the most aggressive marketers in the space, but now appears to have costs under control, sales growth and profits ahead.

Up until now, MGM’s sports betting entry, BetMGM, and its 50% partnership with the UK’s Entain Plc (GMVHF) did not materially contribute to the bullish scenario for the stock. The reasons were clear. Like its peers in sports betting, BetMGM was continuing to pursue excess marketing spend to attract new players, particularly those in new states like Ohio and Massachusetts. So, the overall tone of the sports betting sector continued to evoke wariness among investors who liked the sales growth of major market operators, but saw no immediate remedy for excesses of dealing and marketing spend.

The current structure of the U.S. sports betting market continues to be dominated by the two share leaders: #1 FanDuel ( PDYPY ) and #2 DraftKings ( DKNG ). Our best estimate at this point is that the combined share of market of the two leaders has reached and apparently is sustaining ~68% to 73% of the total with all other platforms running from low double digits to single digits. FanDuel (subject of a possible IPO before the end of this year by its parent Flutter Entertainment) leads, with 45% to DKNG’s 32%.

Everyone else is battling for position. The platforms linked to brick and mortar casinos are trending stronger than their mostly UK based competitors. Fan Duel and DKNG both guide turning profitable by the end of this year.

Above: MGM's app is among the most customer friendly to navigate according to our associates that provide tech stacks for the industry.

Just below them we now have news from BetMGM that it has just about reached the near billion dollar revenue mark as of the first half of 2023. It has posted $944m to dated June 30 ^th . It is now estimated to hit is guidance for the year at $1.8b to $2b by the end of 2023. The partners’ original investment in the platform was around $1b. It has posted YTD $400m in losses, it expects to shave to $150m. But after that, the math begins to look very attractive, with BetMGM’s hold running somewhat above industry peers related to parlay betting increases that bear better than established holds of 7%.

BetMGM's share of market was at 13% and slipped to 11% during the period. This is not unusual, as betting patterns in the various states can swing hold percentages that trigger temporary shifts in share of market state by state. BetMGM also took a slight decline in iGaming, with its share going from 30% to 27% for the period. This, too, is one of the results of the weighting of play by state, established or new.

What this means going forward

As BetMGM has now joined the “Billion dollar sports betting club,” as it were, we can project forward where it may well be in the coming periods. For certain, we are about to enter the NFL season where BetMGM had official status with the league (as do others). Secondly, its live sportsbooks in its 17 properties can be expected to produce revenue gains above average against some of its smaller competitors.

It is among the most scalable entrants in the sector backed up by its casino business and Vegas property powerhouse. Should it prevail in its metro New York bid (It already runs a VLT slot property at Empire State gaming in suburban Yonkers NY), that will enhance its NY sports betting share of market considerably, as it is already a functioning gaming property—(racino easily expanded to a full dress casino).

If we assume that management’s projection of a near $2b 2023 sports betting revenue will come out of a 13% share of market going forward. Estimates of forward growth off a CAGR of ~10% CAGR by Grand View Research seems reasonable given what we know are the entry of new states ahead (maybe four—but not the two biggies in California and Texas).

Forecasts are all over the place, running from utterly crazed $100b (some bulge analysts) to far more realistic ranges from $20b to $30b by 2030. (Morgan Stanley). In our discussions with colleagues in the industry plus our own calculations, we believe the $30b is achievable. We used that base to calculate what we think a site like BetMGM may well be looking at by that year.

BetMGM circa 2030 Revenue calculation: $3.5b. The company leads the IGaming (casino) sector. Sports betting will remain a low margin business no matter what the robust growth cycle ahead. We are assuming that BeMGM’s leading position in IGaming sub-sector ahead can move its operating margins to around 10.5%, which in theory would throw off near $400m profit contribution to the enterprise, with half going to MGM and half to Entain. But that assumes the current partnership deal will still be intact by 2030. In our view, it will not.

This year, various researchers are estimating total U.S. sports betting revenue at ~$7b.

MGM is likely to try again to acquire Entain’s 50% through outright acquisition, or more likely a buy-out. Entain, as does the entire UK betting sector, faces regulatory challenges ahead. The publication in April of the long awaited White Paper on gaming laws by a parliamentary committee concluded with a series of recommendations aimed at tightening consumer risk with betting limits, limits to advertising promotions, and even possible access to the creditworthiness of players.

This can cut two ways. One, it can seriously hit retail betting volumes at betting shops it controls. And equally, put a damper on efforts to grow customer bases among younger demos.

Yet, it is also clear that U.S. regulators are looking at the UK report and talk of regulatory tightening, and it is gaining interest among political leaders worried about rises in addiction.

However, there is a move to monetize Entain’s investment in U.S. sports betting by cashing out and using proceeds to carve down debt, diversify or fatten balance sheets as part of a way to keep its share values high.

Conclusion

Up until now, the sports betting vertical for MGM the parent was not really valued in the overall components that contribute to earnings in a meaningful way. That was directly related to the ongoing uncertainties among investors as to whether sports betting per se will ever be anything more than a marginal contributor to parent profitability. Now BetMGM, going head to head with industry leaders, has a turn to profitability with a revenue projection that puts it near enough to industry leaders. Its positioned to poach share in the months ahead. It has been an aggressive promoter both in giveaway deals as well as measured media ad pushes.

That leaves us with the conviction that investors now need to consider BetMGM potential as part of a reasonable contributor to overall earnings as well as parent revenues. Parent MGM’s revenues (ttm) are $14b rounded off. Should BetMGM achieve its forecast of $1.8 to $2b for the year, we see the entity contributing ~15% of parent revenues with half of its EBITDA going into the earnings column of MGM proper.

It seems to us that MGM’s motivation suggests the old notion that past is prologue. Recall it was a 50% partner with Boyd Gaming (BYD) in the wildly successful Borgata of AC back in 2003. In 2016, MGM bought out BYD’s half for $900m. It has a history of partnership entries that eventually are bought out.

This looms as somewhat of an ongoing discussion among the two partners, which I believe could be a currently low visibility catalyst working on behalf of the stock’s valuation.

As BetMGM clearly looms more important in the MGM universe today than it was when much smaller and losing ever greater amounts of money, it strengthens a BUY signal on MGM Resorts International stock at its current trade of $50, with our PT of $67 by the end of this year.

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