MGM Stock to $17?

MGM Resorts stock (NYSE: MGM), a global hospitality and entertainment company, has seen its stock fall 18% over the past year, while the S&P 500 gained 18%. On the surface, the valuation looks attractive — price-to-sales at 0.5 vs. 3.3 for the S&P, P/E of 17.6 vs. 23.9, and price-to-free-cash-flow of 7.2 vs. 21.1. Yet, beneath these seemingly cheap multiples lies a risk-heavy narrative investors shouldn’t overlook.

At first glance, MGM looks like the kind of stock value investors dream about — inexpensive compared to the market and tied to one of the most recognizable brands in leisure and gaming. But when you look past the multiples, the story gets complicated. MGM’s dependence on consumer spending makes it vulnerable when the economy slows, and its sizable debt burden limits flexibility for growth or shareholder returns. Add in the uneven recovery of its international and digital segments, and it becomes clear why the market isn’t buying the “cheap” narrative.

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The Fundamental Problem

MGM Resorts is facing sluggish momentum. MGM Revenue grew just 0.9% over the past year to $17 billion, with quarterly revenue up only 1.8% to $4.4 billion. Profitability is weak: operating income for the last twelve months of $1.5 billion yields an 8.6% margin, net income sits at $540 million (3.1%), and cash flow margin is 14.7%, all well below industry peers.

Leverage compounds the challenge. With a heavily debt-weighted balance sheet, limited profitability, and tight margins, MGM lacks flexibility. In a rising-rate environment or a slowdown in travel, the company could face serious constraints. Simply put, MGM doesn’t have the cushion that more conservatively financed competitors enjoy.

Historical Precedent

MGM’s history in downturns shows deep vulnerability. During the 2022 inflation shock, the stock plunged 46%, nearly twice the S&P 500’s 25% decline, recovering in about 400 days. In the 2020 pandemic, shares collapsed 79% compared to a 34% market drop, rebounding after roughly 327 days. The 2008 financial crisis was even harsher — a 98% crash versus 57% for the S&P 500 — and the stock has yet to reclaim its pre-crisis peak.

It’s a reminder that MGM’s fortunes are tied not just to its operations, but to broader macro trends it can’t control.

Risk Factors That Could Hurt MGM

1. Excessive Debt Load: The company’s enormous leverage means even minor disruptions in cash flow could impair its ability to service debt.

2. Cyclical Vulnerability: MGM’s revenues are highly sensitive to economic cycles. A downturn in travel, tourism, or consumer spending can have outsized effects.

3. Thin Profit Margins: Low operating and net margins leave little buffer to absorb shocks or invest in growth.

4. Cash Flow Dependence: While operating cash flow is positive, it is modest relative to debt, limiting flexibility for expansion, buybacks, or debt reduction.

5. Market Sentiment Shifts: In a risk-off environment, highly leveraged and cyclical stocks like MGM tend to fall sharply, as seen in prior crises.

The Real Downside Risk

Given its cyclical nature and financial structure, MGM’s downside could be considerable if the economy turns. A broad slowdown in consumer spending would likely hit travel and gaming hard, just as rising interest costs make debt more expensive to manage.

The company’s recovery story assumes that the global leisure market keeps expanding and that consumer confidence holds up. That’s possible — but it’s a fragile setup. One misstep or macro shock could send the stock significantly lower.

So, what’s the realistic downside risk for MGM stock at its current price of $32?

If history serves as a reference, it’s around $17.

Are you ready for that?

This isn’t about inciting fear – it’s simply a reflection of what transpired in 2022. The underlying fundamentals haven’t changed much. The company still generates modest profits relative to its size, operates with tight margins, and remains highly leveraged. As a result, the stock largely moves on growth expectations and prospects rather than current operational strength.

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