Although the S&P 500 is down 2.2% over the past six months, MGM Resorts’s stock price has fallen further to $31.80, losing shareholders 16.9% of their capital. This may have investors wondering how to approach the situation.

Is there a buying opportunity in MGM Resorts, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think MGM Resorts Will Underperform?

Even with the cheaper entry price, we're swiping left on MGM Resorts for now. Here are three reasons why there are better opportunities than MGM and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, MGM Resorts grew its sales at a sluggish 7.4% compounded annual growth rate. This fell short of our benchmark for the consumer discretionary sector.

2. Projected Revenue Growth Shows Limited Upside

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect MGM Resorts’s revenue to stall, a deceleration versus its 10.1% annualized growth for the past two years. This projection is underwhelming and suggests its products and services will see some demand headwinds.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

MGM Resorts’s $31.75 billion of debt exceeds the $2.27 billion of cash on its balance sheet. Furthermore, its 12× net-debt-to-EBITDA ratio (based on its EBITDA of $2.37 billion over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. MGM Resorts could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope MGM Resorts can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

MGM Resorts falls short of our quality standards. After the recent drawdown, the stock trades at 14.2× forward P/E (or $31.80 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are more exciting stocks to buy at the moment. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.

Stocks We Like More Than MGM Resorts

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