In the ever-shifting sands of the stock market landscape, a curious case presents itself; Melco Resorts & Entertainment, a gaming entity traded under the NASDAQ symbol MLCO, is surprisingly purchasable for less than what one might spend on a fast-food meal in the United States. Indeed, two shares of the casino operator’s stock can be had for less than a Big Mac in certain regions – a testament to its remarkably low valuation.
Currently trading at approximately $8.30, the company finds itself within the bargain bin of the stock market. This placement has not gone unnoticed by industry analysts, either – Morningstar recently highlighted Melco as one of the top ten stocks trading for less than $10. Such a price point underscores its accessibility, positioned comfortably below the cost of a daily caffeine fix from Starbucks.
This affordable sticker price comes after a significant 33.3% decline over the preceding year, a tumble so profound it precipitated Lawrence Ho, the CEO of Melco, from his pedestal on Forbes’ list of the wealthiest individuals. Although no longer adorning the ranks of the ultra-rich, Ho’s billionaire status remains intact. However, this financial hiccup has not spared him, nor Melco’s investors, from enduring a protracted period of fiscal discomfort. Back in mid-April 2021, Melco shares commanded a robust $20 each before plunging to a meager $8.30 by July 15, 2022.
Considering the broader market, Melco is not alone in this downturn within the Macau gaming sector. Last year was unforgiving to these gaming stocks, with valuations dipping to lows that reminded market veterans of dire historical benchmarks, including the global financial crisis and the opening salvos of the coronavirus pandemic.
Yet, amidst the bleakness, there remains a glimmer of hope. Not all inexpensive stocks are created equal, and some exude the promising aura of a true value proposition. Melco, according to certain market enthusiasts, could very well represent such an opportunity.
Analysts at Morningstar have set the fair-value estimate for Melco stock at $12.60, intimating that the company’s shares are undervalued by nearly a third. For Melco to reach that target, its share price would need to climb upwards of 50% from where it currently sits. It’s been several months since Melco’s share price hovered above the $12.60 mark, last seen in May 2023.
“Melco’s growth is underpinned by the expanding Chinese middle class and the relatively low market penetration in Macao, especially when juxtaposed with regions like Las Vegas,” notes Jennifer Song, a Morningstar analyst. Song further predicts that new deluxe hotel offerings by key operators should brace the city for an influx of wealthier patrons. These developments are poised to boost revenues for integrated resort operators in Macao, where Melco commands a significant presence with properties like City of Dreams, Morpheus, Studio City, and Altira, not to mention its international holdings in Cyprus and Manila.
With Macau’s non-gaming revenue approaching the highs seen in 2019, and gross gaming revenue on the verge of eclipsing pre-pandemic peaks, it isn’t far-fetched to forecast a surge in Melco’s stock. The unique standing of Melco as one of only six operators licensed to oversee casinos in Macau positions it favorably to ride this potential upswing. “The inauguration of Studio City’s phase 2, which introduces 900 luxury rooms, is expected to be a considerable profit catalyst in 2023,” Song adds.
Moreover, Melco’s diversified customer base encapsulating both mass-market and premium segments insulates it from the more mercurial VIP sector, currently reeling from recent scandals related to junket operations. This diversity safeguards the company’s revenue streams from drastic fluctuations and may be a contributing factor to Melco’s anticipated recovery.
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