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MGM Resorts: Doubling Down on Diversification
Stock Analysis & Ideas

MGM Resorts: Doubling Down on Diversification

MGM Resorts (MGM) is a major part of the Las Vegas casino market. It’s got operations in other countries, of course, but Las Vegas is a big part of its operations. The company has multiple casinos in Vegas, including the MGM Grand, Aria, Park MGM, and the famous, high-end Bellagio.

It’s also got the Mirage in its portfolio, but reports suggest that may not be the case much longer after releasing word that it’s in the early stages of selling off the Mirage altogether.

I remain bullish on MGM Resorts. (See Insiders’ Hot Stocks on TipRanks)

MGM Resorts stock has been in a steady upward climb for much of this year. It kicked off the year down around the $30 mark. With February’s arrival, MGM Resorts saw a spike that started the stock on its upward course.

The value fluctuated somewhat, but generally, the stock was on an upward trend. Today the stock is the highest it’s been in over a year. (See MGM Resorts stock charts on TipRanks.)

The company’s recent gains arrived after CEO Bill Hornbuckle noted that the company, “had enough of Vegas.” Not that they were planning to leave altogether, but rather, that they had a sufficiently substantial portion of the Las Vegas casino market to carry on with.

Reports also noted that MGM Resorts has been working to diversify its operations further. The company has a new casino development going into Japan, and it has been working on improving its position in sports betting, as well as entertainment.

MGM’s earnings report also detailed some substantial gains. The company posted a net profit of $1.4 billion, which compares spectacularly to the $535 million loss it incurred this time last year.

Diversification Is Seldom a Bad Thing

There are very, very few times when diversification is a bad thing. Putting all your eggs in one basket is a good strategy if you mean to watch that basket like a hawk. Having a second basket with spare eggs in it, meanwhile, tends to be a good approach in the event that something happens to the first basket.

MGM Resorts is definitely engaging in diversification. Trying to build up the Japanese market is certainly a major stride forward. We’ve also seen the kind of impact that sports betting programs have had on casinos lately, especially when the COVID-19 pandemic started slowing down physical casino operations.

If something similar were to happen, this time, MGM Resorts would be in a better position to adapt. Not that further lockdowns are particularly likely, but they’re still possible, as 2020 demonstrated abundantly.

Naturally, all these developments require capital to carry out properly. Selling the Mirage would give MGM more liquid capital to dump into these operations. It would also remove one major source of capital spending from the company’s books, freeing up more cash to pour into the new operations.

Wall Street’s Take

Turning to Wall Street, MGM Resorts has a Moderate Buy consensus rating, based on five Buys, five Holds, and one Sell assigned in the past three months. The average MGM Resorts price target of $54.26 implies 7.1% upside potential.

Analyst price targets range from a low of $36.00 per share to a high of $68.00 per share.

Concluding Views

MGM Resorts is making the right moves. It’s not ignoring its current market, which is good, but it’s also not relying unduly on it. Instead, the company is working to expand its operations in several different directions. That’ll help ensure its cash flow despite potential downturns in its primary market.

Nonetheless, several moves in the broader market could hurt MGM going forward. There’s a possible recession coming up and climbing inflationary pressures on hand. In addition, it’s important to not forget about the massive labor crunch already in progress. This makes establishing protective measures a good plan.

MGM Resorts is very focused on entertainment, which often takes it on the chin in a recession. People cut entertainment spending quickly because there are many different options and replacement goods.

Yet, by establishing some protections now, MGM Resorts demonstrates that it means to be in it for the long haul. That’s a perfect reason to be bullish on the company.

Disclosure: At the time of publication, Steve Anderson did not have a position in any of the securities mentioned in this article.

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