Buying shares of Wynn (WYNN, Financial) may seem to be a gamble at the moment. Slowing growth in Las Vegas and uncertainty regarding its $2.5 billion project in Boston could hold back its stock price in the near term.
The company, though, has a strong position in the world’s largest gaming market, Macau. It also has the potential to grow its market share through a long-term strategy that is focused on service and customer satisfaction, rather than discounting. The prospect of a gaming license in Japan plus a pivot away from Las Vegas may also help to improve its risk/reward ratio.
The stock has fallen 5% in the last year versus a rise of 16% for the S&P 500. Past underperformance could make it more appealing from an investment perspective, with a successful turnaround potentially ahead.
Sound strategy
Wynn has ambitious growth plans for Macau, seeking to expand on its current 17% market share of the world’s biggest gaming destination. It is set to develop around seven acres of land adjacent to its best-performing site, Wynn Palace. The company may decide to target VIP customers in terms of its plans for the development. It is focused on creating an entertainment center on the site, which could mean that table games and room numbers are a lower priority when compared to the customer experience. Given the profit potential from VIP customers compared to the mass-market, this could yield a higher return on investment in the long run.
In terms of its VIP offering, the company is focused on delivering high margins that are sustainable over the long term. In its most recent quarter, it suffered from rivals offering higher discounts and rebates to VIP customers. Instead of attempting to compete on price, Wynn will focus on having the most appealing product and best customer service in the market. For example, at Wynn Macau it is building two new restaurants in its original casino and is adding 8,000 square feet of additional retail space.
Growth strategy
Since growth across the gaming sector has moderated in Las Vegas in recent years, the company is targeting its investment in higher-growth locations. Evidence of this can be seen in its revised plans for its expansion project in Las Vegas, with it scaling back a planned $3 billion investment that was meant to include a theme park.
In the long run, the growth potential of markets such as Japan could make the company’s pivot to Asia worthwhile. Wynn is seeking to gain one of three gaming licenses that are due to be awarded by the Japanese government over the medium term. The structure of the licenses is such that each operator will essentially have a monopoly status in a specific city. While there is no guarantee that the company will be successful in its pursuit of a license, and a new project in Japan could cost $10 billion, the country has the potential to become the second-biggest gaming market in the world.
Potential risk
Uncertainty surrounding Wynn’s Encore Boston Harbor development is a risk facing the business. The project is a $2.5 billion resort that is currently under construction. A sale has been rumored in previous months, with gaming regulators mulling over the potential revoking of the company’s gaming license in the state.
The regulator apparently has concerns over corporate governance at the company. If it does revoke the license, it is unlikely that the project will become profitable. Therefore, a sale of the development may be necessary, although finding a potential buyer for the development could be relatively challenging due in part to its size. This could lead to a relatively low price being achieved for the asset sale.
Outlook
While the loss of its gaming license in Massachusetts is a risk facing the company, at the present time its project in Boston is set to open as planned. It is the company’s first project on the East Coast. Given the success of other major developments built by rivals close to major metropolitan areas in the U.S., such as MGM Resorts’ (MGM, Financial) National Harbor near Washington, D.C., the project could become one of its more profitable assets. It also provides diversification at a time when growth in Las Vegas has moderated, and Macau remains susceptible to changes in regulation by the Chinese government.
Investment prospects
Although the company faces uncertainty regarding its development in Boston, this risk seems to be outweighed by the growth potential it has elsewhere. Its dominant position in Macau could catalyze its growth, while it may be able to win market share in the region due to its long-term strategy regarding service and customer satisfaction. Alongside the potential for growth in Japan and its pivot away from Las Vegas, this could allow the company’s stock price to deliver a successful recovery after a disappointing 12-month period.
