MGM Looks Ready To Rally Another 50%

The dog days of summer have come good for MGM Resorts International (NYSE: MGM), who’ve watched their stock jump more than 50% in a little less than four weeks. However, many investors might be scratching their heads as to why the direction was up, not down, after the company reported a revenue fall of 91% year on year at the end of July. Even in the context of COVID and what it’s done to companies and industries, that was a severe drop.

But Wall Street prefers to live in the future, not the present, and so much the better for investors of the $11 billion entertainment, hospitality and casino company. Their Q2 earnings came out on the second last day of July and even though they were fairly grim from a numbers point of view, it looks like Wall Street just wanted to rip the bandaid off. Looking ahead to the rest of Q3, there’s plenty for bulls to be excited about.

Bulls Kept Busy

With the uncertainty of earnings removed for at least another three months, shares have been able to catch a solid bid into August. Having retraced about 40% from their post-COVID high, set in June, another rally was badly needed, especially as the S&P 500 was trickling back up towards all-time highs. Fortunately, several catalysts presented themselves to help propel the recent move.

The continued reopening of economies and rolling back of lockdown restrictions has been the brightest star for MGM this summer as their revenue streams can begin to grind back to life. Macau, Asia’s island Las Vegas, has been at the forefront of this resurgence in particular. Earlier this month authorities in Hong Kong confirmed that the mandatory two week quarantine for Macau travelers on their return to the mainland was being lifted. This opens the way up for gambling tourism to trend back towards pre-COVID levels there with MGM’s 600 room resort open for business.

On top of that, the casino industry as a whole has recently come back into favor with sell-side analysts who think that many gambling stocks are still reflecting worse case scenarios. Penn National Gaming (NASDAQ: PENN) noted a fortnight ago how many millennials are coming to casinos for the first time as nightclubs and bars remain sporadically shut. The growth in online gambling has also been positive and both Golden Entertainment (NASDAQ: GDEN) and Caesar’s (NASDAQ: CZR) have received upgrades on the back of that in recent weeks.

IAC Stake

Then, on the 10th of August, the mega-holding company IAC (NASDAQ: IAC) announced they had acquired a 12% holding stake in MGM. The resulting 25% gap up in MGM shares helped put them right in line with June’s summer peak. IAC called it a ‘once in a decade’ kind of opportunity and this is exactly the kind of momentum needed to keep shares ticking higher into the fall.

In a note to clients after the news, Union Gaming analyst John DeCree wrote “we view MGM’s success in attracting IAC as a strategic investor as a creative way to partially unlock the value of its digital business without having to sell any assets or give up any additional ownership. With a proven track record of investing, creating, and growing media and internet businesses, IAC’s $1 billion investment is not just a vote of confidence for MGM but for the entire industry".

He upped his price target to $27 and shares are making short work of getting there. Reaching it would put them well above June’s high and would close the remaining gap to pre-COVID levels fairly significantly. Shares need a full 50% rally to achieve that and unless there’s a roll-out of fresh restrictions, it’s hard to say they won’t do it in the coming weeks.