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Why Casino Stocks Are a Great Buy Today

Casino stocks were among the hardest hit when COVID-19 hit the U.S., and there hasn't been the same swift recovery we've seen in other sectors. But the gambling industry may not be as hard-hit as you might think. It's not like cruise lines, where ships are docked without customers. This isn't even the hotel industry, where business and leisure travel has dropped to a standstill. 

Resorts in Las Vegas and across the country can still rely on gamblers coming in to play a few hands of blackjack or sit at a slot machine for revenue. And that will keep them afloat until a full economic recovery kicks in. When it does, MGM Resorts (NYSE: MGM), Wynn Resorts (NASDAQ: WYNN), Las Vegas Sands (NYSE: LVS), and Caesars Entertainment (NASDAQ: CZR) could crush the market. 

MGM Chart

MGM data by YCharts

Las Vegas is open for business

Resorts and casinos in Las Vegas shut down when COVID-19 hit in March, but started to open for business at the beginning of June. And customers have flooded back in more quickly than I expected. 

In July, gambling revenue was down just 39.2%, following a 61.4% drop in June. Clearly, customers are coming back and there seems to be momentum building. 

Early indications are that travelers are slowly coming back, with hotel occupancy hovering around 35% last quarter and room rates down significantly across the Las Vegas Strip. But if casinos are still busy, it shows that revenue is flowing in, and when travel picks up we will likely see a quick recovery. 

Macau is not so lucky

Despite the fact that China and Macau were hit by COVID-19 first, the region hasn't recovered as quickly as investors hoped. Gambling revenue was still down 94.5% each of the last two months, and travel restrictions in and around China will hold the region back for some time.

Given the reliance companies like Wynn Resorts and Las Vegas Sands have on Macau, it's not surprising their stocks are down big. But when a COVID-19 vaccine is released and travel restrictions around China are reduced, we've seen that the casino industry can recover extremely quickly. 

Online gambling is the big upside

The new upside for 2020 is online gambling, and that's where I think a stock like MGM Resorts has the most upside. Online gambling is simply a product extension for these companies, and there's almost no risk to them financially. But for now, only Caesars and MGM have any sort of online offering. 

We don't know how big the online gambling business will be long-term, but investors buying casino stocks today are getting a good foundation with existing resorts and adding in pure upside from online gambling. 

There's value in casino stocks today

Long term, I don't think the earning potential for casino stocks has changed much at all. Resorts in the U.S. and Macau still have restricted supply, so as demand returns, so will earnings. You can see above that the U.S. has shown that demand can come back relatively quickly. 

Not only is there an upside for regular casino operations, but the online gambling business could also be a bonus for shareholders. If it takes off across the U.S., stocks like MGM and Caesars could be growth stocks for years to come. The value investors are getting today is worth the bet in casino stocks. 

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Travis Hoium owns shares of MGM Resorts International and Wynn Resorts. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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