How MGM Resorts Stock Could Drop Another 50%

Core Insights - MGM Resorts stock has declined by 18% over the past year, contrasting with an 18% increase in the S&P 500, despite appearing undervalued based on various financial multiples [2][3] - The company's reliance on consumer spending and high debt levels pose significant risks, complicating its investment appeal [3][5] Financial Performance - MGM's revenue increased by only 0.9% over the past year to $17 billion, with quarterly revenue rising just 1.8% to $4.4 billion [5] - Operating income for the past twelve months was $1.5 billion, resulting in an 8.6% margin, while net income stands at $540 million (3.1%) [5] - Cash flow margin is at 14.7%, significantly below industry peers [5] Debt and Leverage - MGM's heavily leveraged balance sheet limits its flexibility, making it vulnerable in a rising-rate environment or during travel downturns [6][12] - The company lacks the financial buffer that more conservatively financed competitors possess [6] Historical Context - MGM's stock has shown profound vulnerability during economic downturns, with a 46% drop during the 2022 inflation crisis and a 79% decline during the 2020 pandemic [6] - The stock has not regained its pre-crisis high from the 2008 financial crisis, which saw a 98% drop compared to a 57% decline in the S&P 500 [6] Risk Factors - MGM's cyclical characteristics and financial setup indicate significant downside risk if the economy falters, particularly with rising interest rates affecting debt management [9][10] - The company's recovery relies on the growth of the global leisure market and sustained consumer confidence, which is precarious [10] Key Vulnerabilities - High debt load means small disruptions in cash flow could hinder MGM's ability to meet obligations [12] - Revenues are highly sensitive to economic fluctuations, with declines in travel and consumer spending having disproportionate impacts [12] - Narrow profit margins provide little cushion to withstand shocks or invest in expansion [12]