News out of Las Vegas has been nothing but bullish for investors over the last few months, and it seems that the pandemic will keep easing. At multiple companies, management has said weekends are booked and larger groups are planning trips for later this year, which should drive a sharp recovery from pandemic lows a year ago.
Despite how bad the last year has been, Las Vegas stocks like Caesars Entertainment (NASDAQ:CZR), MGM Resorts International (NYSE:MGM), and Wynn Resorts (NASDAQ:WYNN) could be getting set up to crush the market. Here’s why investors might want to consider gambling stocks to be growth stocks once again.
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Las Vegas is back
Companies’ bullish comments on Las Vegas should be taken with a grain of salt because they have an interest in presenting an optimistic picture to investors. But we’re seeing a pickup in official data as well.
According to the Las Vegas Convention and Visitors Authority, visitor volume has steadily increased this year from 1.29 million in January to 1.54 million in February, and 2.23 million in March. On weekends, hotel occupancy was 77.7% in March, but midweek occupancy was just 47.8% as convention business has been slow to return.
For context, 3.33 million visitors came to Las Vegas in February 2020, and hotel occupancy was 94.8% on the weekend and 82.6% midweek.
Gambling is quickly returning as well. Pre-pandemic, gambling revenue on the Las Vegas Strip was between $500 million and $600 million per month. In January 2021, gambling revenue was $322 million, and that’s improved to $501 million in March. Las Vegas is certainly recovering quickly, and at this pace, it might be back to pre-pandemic visitation and gambling numbers by the end of the year.
Online gambling is booming
Online sports betting and iGaming are expanding across the U.S., and the biggest names in Las Vegas are getting in on the game. Caesars acquired William Hill for $4 billion earlier this year to dive into online gambling.
Wynn Resorts recently announced that its online gambling operation, Wynn Interactive, is going to be spun out and merged with special purpose acquisition company Austerlitz Acquisition (NYSE:AUS). The deal values the company at $3.2 billion and leaves Wynn Resorts with about a 58% ownership stake.
MGM Resorts already has the biggest presence through BetMGM, a 50/50 joint venture with Entain (LSE:ENT) that analysts are valuing at around $14 billion with 24 markets that it’s open in or in negotiations with.
Online gambling is a big help to Las Vegas casino companies because it leverages their physical locations and brands to grow, but doesn’t require multibillion-dollar investments in land and buildings to generate revenue. Long term, these could be the biggest profit drivers of casino stocks.
Inflation might not be a bad word
This might sound counterintuitive, but inflation could actually be a good thing for Las Vegas casinos. When a casino is built, companies spend billions of dollars upfront on land and construction, hoping that the property will pay off over time.
Inflation won’t necessarily change that calculation and could actually help it. If the price of hotel rooms, food, drinks, and even gambling inflates, it means that resorts and casinos will be able to generate more revenue from offering the same goods. But its biggest cost, building the casino, hasn’t changed at all.
There are caveats to this, like potentially rising interest rates on debt and wealthy gamblers potentially having less to spend in Las Vegas, but overall I don’t think inflation is a huge risk for Las Vegas casinos. And that could be a differentiator versus stocks that face worries about inflation.
It could be a boom year
As numbers start to trickle in, it looks like Las Vegas is recovering quickly and there’s potential for a huge boom in demand later this year. The higher gambling revenue and occupancy rates that I highlighted above include very little business or convention demand, so there’s a gap to be filled.
Now that COVID-19 vaccinations are available to most Americans and mask mandates are melting away, it’s possible we see an explosion of demand later this year. If that happens, MGM, Wynn, and Caesars could all benefit. Given their better balance sheets and exposure to Macao, China, MGM and Wynn are my picks as Las Vegas opens, but all three could have a great year in 2021.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.