MGM Resorts International: When Boring Becomes Brilliant

Everybody knows that fast is good, but what about big and fast? Better in most cases of competition, right? We think so. We have been recommending ‘Epicenter’ stocks since the nadir of the pandemic. Our Head of Research Tom Lee was chastised for saying these imperiled names were buys, the S&P 500 is up roughly 75% since then, and his reasoned call at the depths of a 'blood in the streets' moment has been hailed as one of the best contrarian market calls of the last decade. As the market realized these stocks were sources of significant alpha, they piled in, but many investors never truly listened to our narrative.  As the pandemic recedes, consumer wallets will take a massive shift to the in-person socialized activities that there has been an unprecedented absence of. However, just as important is what these companies have done to boost operating leverage and amend their business models in the meantime. MGM somehow has pivoted to a position where it will almost certainly be one of the leading names in the rapidly developing Sports Betting and i-Gaming markets and we believe it’s traditional assets make it a play with a lot more upside and a lot less valuation risk than pure plays Draft Kings and Fan Duel.

On the traditional side, it appears demand and occupancy are returning. We cannot yet know the effects of massive cost cuts, new efficiencies, and innovations in business practices on EPS until demand returns. There's a lot of reason to think shareholders will like what they see when those three and a half-day trips that tens of millions of Americans take every year start to be booked en masse again. However, the real opportunity for MGM lies in what those customers will be doing with the remaining 362 days of their year. It is making a big bet that it can capture more of their time, and money over this usually out of reach universe for the company. The key is in their BetMGM partnership with Entain, a British sports betting giant. MGM recently made an 11.1$ bn bid for the company that was rejected, however, we wouldn’t be surprised to see the deal close at a higher level eventually. The synergies are compelling. An industry expert, Howard Jay Klein said “A merged casino and sports betting database is pure gold.” We would have gone with Bitcoin, but you get the point.

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