MGM Resorts International was downgraded to "Market Perform" from "Outperform" by investment services company Citizens JMP, which cited a worse-than-expected Las Vegas market weakness for its decision.
Key Takeaways
- Citizens JMP downgraded its stock evaluation of MGM Resorts from “Outperform” to “Market Perform.”
- The analyst highlighted an anticipated slowdown of the Las Vegas market as key to recategorizing the stock.
- That’s despite a 34% increase in net revenues for BetMGM Q1 2025 and record Q1 Las Vegas Strip occupancy at MGM Resorts locations.
Seasonality is anticipated on the Strip, but analysts highlighted near-term softness as being more structurally alarming. This calls MGM's valuation trajectory into question amid a lack of visible growth drivers or operating leverage recovery.
Despite notable gains across several business lines, including BetMGM's turnaround to a $22 million EBITDA and 34% revenue growth in Q1 2025, the downgrade stems from the conundrum of relying heavily on existing operations. The analyst report suggested MGM's current stock price reflects fair value under present conditions, with more promising investments available elsewhere in the gaming sector.
The Las Vegas Strip business had its best-ever Q1 slot win and record April hotel bookings, aided by the Marriott partnership. Yet, the residual impact from last year's Super Bowl – roughly $65 million – weighed on annual comparisons. Weather-related setbacks also dampened performance in regional properties.
MGM China held steady with a 15.7% market share and 28% margins, while the company moved ahead on a JPY428 billion equity commitment for its integrated resort in Japan, up from previous estimates. This increase could exert financial pressure in the long term.
The MGM Rewards program has now surpassed 50 million members, doubling since 2020 and contributing to brand stickiness. The brand upgraded MGM Rewards in March to add more benefits for members at land-based properties. Meanwhile, MGM's expansion into Brazil's digital market shows encouraging early signs. However, the digital segment faced revenue pressure in the Netherlands and Sweden due to regulatory and comparative headwinds.
The firm's $200 million EBITDA enhancement plan remains underway, with most of the gains anticipated in 2025. Nearly $709 million was deployed in share repurchases over Q1 and Q2. Still, progress on business interruption insurance remains unclear, with potentially erratic timing and amounts.
Unusual options activity suggests bullish sentiment
MGM Resorts also saw a sharp uptick in bullish options trading this week, with volume hitting 19,997 call contracts—11 times the daily average. This led to implied volatility climbing to 36.99%, suggesting elevated expectations among traders as the company approaches its next earnings release on July 30.
The weekly 34.5 and 34 call options dominated trading activity, accounting for nearly all the volume. With a Put/Call Ratio of just 0.02, market sentiment appears optimistic despite the recent downgrade.
Analyst targets for MGM stock span a wide range, from a low of $35 to a high of $59, with an average of $46.04. This implies a potential upside of more than 36% from the current price of $33.79. Despite mixed signals, the average brokerage recommendation remains at 2.0, suggesting a continued, albeit tenuous, proclivity toward optimism in MGM's near-term prospects.
