There is no doubt that the human and economic toll of the Coronavirus is going to be absolutely devastating worldwide and we don’t yet fully understand the long term ramifications both from a public health and economic standpoint.
In particular, the losses to the gambling industry are sure to be massive given the emphasis on both social distancing and the very real affects of job losses across the globe. One company that’s particular vulnerable to these outcomes is Wynn Resorts, who has taken an absolute beating thus far, first with the closures in Macau and now with the closures in Las Vegas.
In just the last two years Wynn stock has fallen from its’ recent all-time high of $198.00 in May of 2018 to as low as $43.00 on March 18th, 2020. While the company has been plagued by scandal in recent years, it was able to brush off most of the negative impact from the fallout with founder Steve Wynn’s resignation, and had enjoyed success until the severity of the Coronavirus outbreak was starting to be fully understood in February 2020.
Below we are going to take a look at some of the most important factors that are likely to impact Wynn Resorts stock performance, and what those could mean for long term revenues for the company.
Biggest Risks For Wynn Resorts:
It’s hard to find any good news in all of this for Wynn, there are just so many negative things going on simultaneously that are going to heavily impact resort operations and revenues. Some of the biggest catalysts for decreased current and future revenues include:
- Unknown containment timeframe of the Coronavirus
- Heavy reliance on junket operations in Macau
- Decreased consumer spending
- Rising tensions between the US and China
Unknown Coronavirus Timeframe
Perhaps the biggest and most challenging aspect of the current global pandemic is that no one is sure exactly how long worldwide disruptions are going to last. We have yet to understand the full impact of the virus both in terms of spread and fatality, and with social distancing becoming the new norm it’s highly likely that crowded casinos, restaurants and shows are going to be very low on the list for most consumers for a long time to come.
This presents a very difficult decision for Wynn Resorts when it comes to planning. How do they budget? Should they keep paying staff? Will shutdowns continue globally or regionally? All of these questions are almost impossible to answer right now, so it’s literally chaos when it comes to planning, organizing and running a global business like Wynn.
In the the last few weeks, it seemed the company had a view that the shutdowns would be shorter, as indicated by their willingness to continue paying staff at their Las Vegas properties. However, as the situation continues to expand there are indications that this is starting to change, with the recent announcement that CEO Matt Maddox will forego 100% of his salary while other executives taking cuts ranging from 33% up to 100%.
Long story short, providing further guidance when it comes to revenues and key company metrics will be extremely challenging from a management perspective. From a stock valuation perspective, investors at this point are really betting on a recovery timeframe to determine future revenue opportunity for the company – and at this point it’s anyones guess what that might be.
Macau Junket Operations, Consumer Sentiment & Tensions
Outside of the gaming industry, many people aren’t aware that 90% of Wynn Resorts gaming revenue comes from the small Chinese enclave of Macau.
With mega VIP gamblers able to easily transit the Chinese border and gamble freely in Macau (it’s illegal in China), gaming companies from around the world have raked in billions of dollars providing high-end Vegas style casino-resorts for a Chinese audience.
Because of strict capital controls in mainland China, gamblers playing in Macau need access to credit which is provided by junket operators – essentially companies that bring in big players, put up their gambling money and collect debts on the backend in China. It’s a highly secretive industry and has been criticized many times over its’ link to organized crime, but nonetheless this is the the way operations work in Macau.
So back to the fundamentals – Wynn derives approximately 90% of its’ gaming revenue from Macau according to 2018 figures. This translates into about 64% of its OVERALL revenue each year based on 2018 data. So more than half of the companies annual revenues are from gambling operations in Macau – not food or entertainment – only gambling.
Because of this, it’s very likely that the company is going to suffer a severe hit not only this year, but I predict moving forward due to a number of factors including:
- Rolling lockdowns in China to contain the virus
- Growing number of risk-averse mainlanders who want to rebuild savings
- Potential new capital controls and restrictions as tensions between the US & China grow (see here, here and here)
For all of these reasons, I believe that Wynn is going to take a pretty long term drastic hit to revenues. The company will undoubtedly survive this crisis, but will likely need to restructure its operations and projections dependant on the length of the health crisis.