Wynn: Sports Betting App Late To The Party, But Company Still Has The Best Brick-And-Mortar …

“Quality is more important than quantity. One home run is much better than two doubles…”

– Steve Jobs

For any number of reasons over a very long time, we have been big fans of Wynn Resorts Ltd. (WYNN) shares. I have a personal history as a participant and observer in friendly, but tough competition with Wynn properties when I held a C-suite position at Caesars Entertainment (CZR). I also went way back in the day as an occasional lunch partner of Steve himself as we ruminated about the business. Our wide-ranging discussions included chats about the future of online gaming, decades before it took center stage in the business.

ChartData by YCharts

We also talked about the risks and potential of online. Would it destroy the brick-and-mortar business? Would customers turn blasé about the brick-and-mortar properties’ spectacular events, posh rooms, dining, spas, live casino action, and the excitement at the sports books during big games? What clearly changed as the years unfolded was the migration of revenue into ever-more-elaborate non-gaming amenities.

Yet, over time, Steve had developed an ambivalence toward online gaming’s future. But he was no Luddite. In fact, he was a pioneer investor in video games pioneer Activision Blizzard (ATV). He was also the first and only casino operator who had financed and built his own slot machine development lab to plumb new technologies in order to enhance customer experience.

But when it came to online gaming, he once told me this (paraphrased from memory): “I’m kind of mulling it. We are selling a singular socializing experience to human beings. They love the gaming rush, the escape, the sense of joy that live gaming can confer on people during their visits. They want the nice rooms, the shopping. They want to return home and tell their friends, yes I lost my ass, but did we have a ball. You can’t get that pushing buttons on a phone or a computer.”

There was also his prescient assessment of sports betting as a profit center for casinos. “How do you build a business that holds 5% or 7%? What’s really best about it is how it contributes adrenalin to the getaway to those customers who visit during great sports events and make a laydown on a game.” Wynn properties, then and now, have had a generally higher total RevPAR value than peers. And I recall once doing an event that drew a cluster of Wynn high-end bombers. During the weekend, at least five of the guys kept ducking off the floor to the lounge to watch NFL games in progress. These were players who regularly had between $25,000 and $50,000 a week rolling on football games on bets with their bookies. That demo continues to run in Wynn customers’ DNA today.

In March 2018, Wynn was forced out. And it was a sad loss to the future of the company, and still is, to some extent. To be fair, in the aftermath of his departure, successor management had to navigate itself through a trench warfare field of obstacles. First, exit Wynn cronies from the board. Second, settle the Okada lawsuit. Third, bring in deep-pocketed investors. So, in March 2018, just after Steve left, along came Galaxy Entertainment Group (GXYEF), the Macau casino giant, with a 4.9% buy of newly issued Wynn shares at $175, or $900 million.

Then, the company had to restructure management and get its arms around a less-than-forecasted launch of Encore Boston Harbor. On top of all that came the pandemic, which decimated Wynn’s Macau business and continues to ramp slowly to recovery.

With the advent of the SCOTUS sports betting decision in May 2018, the gold rush began by existing online platforms and casino operators, making a head-on assault of the exploding sports betting space. But Wynn’s response was delayed, no doubt attributable to some degree to the other massive priorities the company had to face.

Wynn Interactive JV

(Above: BetBull from the UK has a social gaming, element to the betting experience. Source: BetBull archives)

It was not until late 2018 when the company announced it had closed an $80 million deal with BetBull of the UK to partner in a sports betting venture. Last month, Wynn completed financing its equity stake at 71%, with the remaining 29% staying with BetBull’s current holders. The company says it believes the deal will give them access to 9 states, representing 20% of the addressable market. Wynn believes that the app’s social gaming appeal separates it from the still-growing pack of sports betting apps in that bettors can establish chat rooms where friends can bet together. Time will tell. What is clear now is that Wynn, long known as the leading-edge innovator in the casino space, will have to leap over far too many competitors to establish a powerful sports betting revenue stream. According to the company’s 3Q20 earnings release, to date, BetBull has clocked ~$20 million in revenue. It’s now Wynn Interactive. It will be respectable, accretive, but never near a top-tier market leader.

BetBull is not a reason to be long Wynn: Wynn’s strong grasp of the premium end of the casino market is where it will shine

We have seen how the propulsion of sports betting has triggered a surge of investor enthusiasm for casino operators like Penn National Gaming Inc. (PENN) and the new Caesars Entertainment Inc. Both these companies have plunged head-first into the space, money no object, low-hold business notwithstanding. They’ve dived in amid massive pandemic headwinds on their far more crucial brick-and-mortar casino business. Here are two key players stock movements this year.

Penn shares 1-year glance:

May 20,2020: $7.89, pandemic-decimated.

September 28, 2020: $72.75 crazed sports betting catalyst triggered by the company’s buy of Barstool Sports late last January.

Since then, analysts have been gaga over the stock, which at writing has eased down a bit to $68.79. Our view now: A good, solid operator but still overvalued due to analyst PTs hanging in around $73.82. The jury is out on that price.

Caesars shares 1-year glance:

March 11, 2020: $8.82, pandemic plus pre-close on El Dorado merger issues, more perceived than real.

February 17, 2020: $68.93. A realistic valuation in light of its becoming the emerging giant of the US casino industry.

Since then, CZR has moved to acquire UK legacy betting operator William Hill plc (WIMHF) for $3.61 a share approved today by UK holders. CZR’s price at writing is $64.55 with a PT of $73.82. I compare the gateway value of both PENN and CZR into sports betting, i.e., the Barstool to Hill acquisitions. In my view, CZR is the runaway favorite here.

In fact, I think the current PT is on the low side post pandemic. I see both companies ramping a rising recovery of regional casino revenues as the vaccine arrives, but CZR’S will be bigger and faster because it’s got more properties, a golden 55 million database and citadel of Las Vegas strip properties.

The reason to be long Wynn now is brick-and-mortar Wynn

(Below: Wynn Las Vegas: Most profitable on the strip due to top demo.)

Our calls on SA

April 11,2020: Price at writing: $70.72. Our PT $100.

July 16, 2020 Price at writing: $84.98. Our PT still $100

Price at writing today: $98.25 ~our PT last April

Our PT now: Post pandemic by 2Q21 or early 3Q21: $150-$160

Pandemic positioning

Macau: Wynn’s two properties have taken a disproportionate hit to the market’s pandemic swoon because of its dominant dependence on the vitality of the VIP and upper end of the premium mass market segments. Further complicating its recovery is the huge withdrawal of funds by customers from its biggest junket operators like Suncity Group (SCGHF, HK1383). It’s a “canary in the coal mine” sign.

(Above: Wynn Palace Macau showing where Crystal Palace pavilion will be sited with 2,000 more rooms and diverse amenities. Source: Wynn archives)

Overall, the Asian junket business – which, since the early 2000s, has been the citadel of the VIP segment – is shrinking. The aforementioned Suncity Group has already migrated its asset allocation to full ownership of casinos in Asian markets.

But VIP still represents around 50% of total Macau revenues, which I am forecasting to recover to ~$22 billion in 2021, which represents ~60% of the 2019 high of ~$37 billion. This assumes a timely arrival of effective vaccines and mass inoculations underway in Asia. We now know that at least two Big Pharma companies are at the gateways of getting their vaccines approved, both testing at above 90% effective.

An increasing tide of bullish vaccine news will propel the Macau sector stocks smartly ahead over the next 90 days. The media focus will be on the mass sector as travel bans are slowly removed. But the same factors will impact the high end of the premium mass sector that will swiftly move the recovery arc for the two Wynn properties. On top of that, we will see a rapid transformation of the VIP segment business from junket dependency to in-house marketing and credit resources.

As junkets shrink and in-house customer maintenance rises, the cost line on junket commissions will decline, bringing more to the bottom line on the tight margin play than ever before. Wynn will be a principal beneficiary of this trend by 2Q21.

The debut of the massive SJM Holdings Ltd. (SJMHF, HK 0880) Grand Lisboa Palace with its 2,000 rooms sometime early next year is poised to recover some of the 12% of market share it has lost since the arrival of new properties at the Cotai. But that impact will largely be felt in the mass segment, where Wynn has a marginally representative share but not dominance or marketing focus. So, Wynn properties face a far less daunting cannibalization potential – temporary as it may be – from that development. It will translate to robust earnings increases relative to pandemic-plagued 2020.

Also, Wynn has pressed on with development and design work for its $2 billion Crystal Palace Cotai project, a 2,000-room increase adjacent to Wynn Palace. The project will have a park-like public space with an art museum, dining and arena. It’s a project conceived during Steve Wynn’s tenure, reflecting a continuing belief by the company extant today that the live casino brick-and-mortar experience stands at the core of the company’s business model.

Las Vegas: Wynn has invested in a meeting and convention center on the west strip at the Encore. Prior to the pandemic crisis, its two properties continued as the most profitable in the market due to its upscale customer base. Yet, it is less dependent (around 10%) of its revenue run rate on meetings and conventions as is MGM Resorts International (MGM), for example. Its new meeting/convention facility will nudge that segment forward. But in the end, its Las Vegas footprint will be all about the upper end of the visitor market.

Encore Boston Harbor: Since its grand opening in June 2019, the property underperformed expectations for any number of reasons. The principal culprit was identified as the slot business not meeting forecasts. Bear in mind that PENN had opened a slot parlor in nearby Plainridge that was also underperforming forecasts at the time.

There has been a change in management at the property since. The pandemic, of course, has taken its toll. And there has been much scuttlebutt around the industry that at some point, the company might be inclined to pick up the phone when a potential buyer for the $2.5 billion property came calling. In its most recent earnings call, management said it had seen a significant improvement in slots since it restructured its customer rewards programs and marketing focus.

Encore Boston Harbor was originally configured with 3,000 slots, but the count has now been reduced to 1,800 machines. During Q3, win per unit per day had risen to a very impressive $407 vs. $219 y/y. And this, during the pandemic, augurs for even better results post pandemic.

Takeaway

To a large extent, casino stocks with high sports betting profiles have performed remarkably during the ongoing pandemic. The operating assumptions of Mr. Market here are clear: people can’t travel, nor do they wish to risk it, so they are sitting in front of their laptops or tablets, or mostly punching buttons on their phones and betting up a storm. Furthermore, state after state is legalizing the activity, with three more added to the total 19 this past election.

In all this surging euphoria, we have analysts publishing PTs wildly enthusiastic about the prospects of some stocks. One analyst last week put a PT of $100 on the shares of pure play DraftKings (DKNG), built off assumptions of its ability to get a dominant market share going forward in established as well as new markets. DKNG will do fine but for the moment, I see that PT as something of a trees growing to the skies bet. Time will tell as more states enter the fray.

The key here is that given its relatively late start, the BetBull app will do fine. But we do not expect sports betting to be as large a future component of Wynn’s revenue streams as that of its peers. Its gut-level, proven performance lies in building and running the best properties in the business.

The investment thesis of Wynn remains strong, in our view, in spite of its playing catch-up ball in sports betting. The company’s brick-and-mortar casino properties are among the top tier in the entire industry in all its markets. Wynn drips with the Steve Wynn touch, which means it has the most intuitive grasp of what higher-end players want and expect in casino visits. And given their willingness to pay higher room rates, higher prices for food and surround themselves with the luxury messages, the physical property excels courtesy of the business model created by its founder.

We also think the time may be inching closer where a very deep-pocketed potential buyer/partner like a Galaxy Entertainment Group, for example, might make a friendly run. In summary: Pre-Steve resignation, you wanted to be partners with him, and when you did, time proved you’d made a great bet. He’s gone, but so much of what he created remains at the heart of the business model. You still want to be partner in the recovery of the stock that I believe will come, whether or not the company is late to the party in sports betting.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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