After Rising Over 30% In 2023 Is This Casino Stock A Better Pick Over Western Digital Stock?

-7.96%
Downside
53.39
Market
49.14
Trefis
WDC: Western Digital logo
WDC
Western Digital

Given its better prospects, we believe MGM Resorts stock (NYSE: MGM) is a better pick than  Western Digital stock (NYSE: WDC) for the next three years. Although these companies are from different sectors, we compare them because they have a similar market capitalization of around $16 billion and a similar revenue base of about $12-13 billion. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. In the sections below, we discuss the possible returns for WDC and MGM in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.

Looking at stock returns, WDC stock has seen little change, moving slightly from levels of $55 in early January 2021 to around $50 now, while MGM stock has seen extremely strong gains of 50% from levels of $30 to $45 over the same period. This compares with an increase of about 25% for the S&P 500 over this roughly three-year period.

Overall, the performance of WDC stock with respect to the index has been quite volatile. Returns for the stock were 18% in 2021, -52% in 2022, and 66% in 2023. Similarly, the increase in MGM stock has been far from consistent, with returns of 42% in 2021, -25% in 2022, and 33% in 2023. In comparison, returns for the S&P 500 were 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that WDC underperformed the S&P in 2021 and 2022, while MGM underperformed the S&P in 2022.

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In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector, including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could WDC and MGM face a similar situation as they did in 2022 and underperform the S&P over the next 12 months – or will they see a strong jump? We expect growth in both stocks in the next three years, but MGM will likely fare better between the two.

1. MGM’s Revenue Growth Is Better 

  • MGM’s revenue growth has been better, with a 21.1% average annual growth rate in the last three years, compared to -7.4% for Western Digital.
  • Western Digital’s revenues rose from $16.7 billion in fiscal 2020 to $18.8 billion in 2022 (the fiscal ends in June) due to high demand for cloud storage.
  • However, the sales plunged to $12.3 billion in fiscal 2023 due to significant storage price erosion and reduced purchases by enterprise customers.
  • MGM’s revenues plunged 60% to $5.2 billion in 2020 from $12.9 billion in 2019 due to the impact of the pandemic. However, revenues have been trending higher since and stood at $13.1 billion in 2022.
  • This can be attributed to a pick-up in demand at the Las Vegas Strip as well as Macau.
  • MGM’s Macau business is witnessing a strong rebound after China relaxed its intense Covid-19 restrictions last year. While the mass-market segment in Macau has seen pent-up demand, the VIP segment has also shown signs of picking up.
  • Customers have also been spending more on average at casinos, with average hotel room rates also trending higher.
  • Separately, MGM’s Vegas business is also benefiting from the inclusion of the results of The Cosmopolitan, which the company acquired in May 2022.
  • If we look at the last twelve-month period revenues, MGM fares better with sales growth of 25% vs. -35% for Western Digital.
  • Our Western Digital Revenue Comparison and MGM Resorts Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, both companies are likely to see high single-digit average sales growth over the next few years. The sales growth could spike for Western Digital in case of a better-than-expected recovery in storage demand. The industry has witnessed a decline over the last year or so with data centers having large storage inventory amid lower consumer demand.

2. MGM Is Profitable

  • Western Digital’s operating margin declined from 2.0% in fiscal 2020 to -8.9% in 2023, while MGM’s operating margin fell from 30.1% in 2019 to 10.8% in 2022.
  • Looking at the last twelve-month period, MGM’s operating margin of 0.3% fares better than -18% for Western Digital.
  • Western Digital’s margin metric has partly been weighed down due to manufacturing underutilization and inventory write-downs, among other factors.
  • Our Western Digital Operating Income Comparison and MGM Resorts Operating Income Comparison dashboards have more details.
  • Looking at financial risk, MGM fares better. Its 44% debt as a percentage of equity is slightly lower than 47% for Western Digital. Also, its 9% cash as a percentage of assets is slightly higher than 8% for the latter, implying that MGM has a better debt position and more cash cushion.

3. The Net of It All

  • We see that MGM has seen better revenue growth, is more profitable, and has a better financial position.
  • Looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe MGM will offer better returns in the next three years.
  • If we compare the current valuation multiples to the historical averages, MGM fares slightly better. MGM stock trades at 1.0x sales compared to its last four-year average of 1.2x, and WDC stock trades at 1.4x revenues vs. the last four-year average of 1.0x.
  • Our Western Digital (WD) Valuation Ratios Comparison and MGM Resorts (MG) Valuation Ratios Comparison have more details.

While MGM may outperform WDC in the next three years, it is helpful to see how Western Digital’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Jan 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 WDC Return -4% -4% -26%
 MGM Return -1% -1% 53%
 S&P 500 Return -1% -1% 112%
 Trefis Reinforced Value Portfolio -4% -4% 583%

[1] Month-to-date and year-to-date as of 1/4/2024
[2] Cumulative total returns since the end of 2016

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