Why Wynn Resorts Is a Risky Bet

Wynn Resorts (WYNN) is a casino and entertainment resort operator in the United States and internationally.

Its flagship Wynn resort resides on the famous Las Vegas Strip. The company also has significant operations in Boston and Macau. Wynn stock has fallen 22.7% year-to-date and currently trades more than 42% off its 52-week high. Still, this stock may have further to fall as serious headwinds remain.

I am bearish on WYNN stock. (See Analysts’ Top Stocks on TipRanks)

Trouble in Macau

A significant portion of Wynn’s revenues come from its Macau operations. Macau is a semi-autonomous area on the south coast of China near Hong Kong.

Since the beginning of the COVID-19 pandemic, the Macau operations have been under significant stress. Casinos were closed in February 2020 and then reopened with significant restrictions. Travel has been anemic and each new variant increases the serious risk of further troubles.

For example, the October Golden Week holiday saw just over 8,000 visitors to Macau. In 2019 there were nearly 1 million visitors over this same period. The drop is simply astounding.

For Fiscal Year 2020, Wynn’s revenue from Macau operations fell to $980 million. This is a 78% drop from 2019 when the company earned over $4.6 billion in revenue from the Macau operations. Through the first nine months of 2021 the numbers have improved, with Wynn posting $1.2 billion in revenue from Macau, but it’s still lagging far behind the 2019 pace.

If this were not difficult enough, scandals involving junkets have arisen, causing some casinos, including Wynn operations, to close VIP rooms. This has also prompted the government to turn a watchful eye towards casino operators.

This creates even more peril for Wynn’s Macau operations, and for the company’s results as a whole. The combined political and COVID-19 risks add up to an unfavorable risk-reward trade-off.

By the Numbers

Wynn’s revenue in 2021 is running well above 2020 figures, but still significantly lagging behind 2019. In Q3 2021, the company posted $995 million in total revenues, a 40% drop from the $1.65 billion posted in the same period of 2019.

The company has also posted an operating loss for the last seven straight quarters. Wynn has lost $282 million from operations over the first three quarters of 2021. There is no indication that this trend will be ending soon.

Servicing the large debt is another hinderance that investors should consider. The company reported $11.7 billion in long-term debt as of September 30, 2021. Much of this debt, $10 billion worth, existed prior to the pandemic.

The cost to service the debt is significant. Thus far in 2021, the company has expensed over $450 million in interest. For perspective, the interest expense has amounted to 30% of the company’s entire gross profit for the first three quarters of 2021.

Wynn Resorts is also not trading at a significant historical discount. Wynn currently trades at a forward EV-to-revenue ratio of 3.7. On December 31, 2019, this ratio stood at just 3.4.

Like many stocks in the market, the valuation has risen above the fundamentals. With the Federal Reserve set to increase the rate of tapering, and interest rates potentially rising faster than previously expected, the market may become more focused on valuation metrics. This could be bad news for a stock like Wynn Resorts.

Wall Street’s Take

Turning to Wall Street, Wynn Resorts receives a Moderate Buy consensus rating, based on five Buy ratings and seven Hold ratings. The average Wynn Resorts price target of $108.11 implies 31.6% upside potential.

Too Much Risk

Wynn stock has fallen far from its 52-week high, and may look tempting to investors; however, serious headwinds remain.

The Macau operations are struggling. The numbers are currently running far behind 2019 figures, and this is unlikely to change anytime soon.

Because of this, the overall financial picture is much bleaker than it was in 2019, yet the valuation does not yet reflect this reality. Wynn stock has further to fall before becoming a compelling investment opportunity.

Disclosure: At the time of publication, Bradley Guichard did not have a position in securities mentioned in this article.