The week didn't start very well for Macau's gaming stocks. Melco Resorts Entertainment Ltd (MLCO +1.44%) took the brunt of the fall, dropping 10.6% in trading Monday, but Wynn Resorts, Limited (WYNN +2.24%), Las Vegas Sands Corp. (LVS +1.64%), and MGM Resorts International (MGM +0.26%) also fell 7.9%, 6.7%, and 3%, respectively.
What caused the drop was a less than stellar June for Macau's gaming market. Gaming revenue was "only" up 12.5% versus a year ago to $2.8 billion, below the 18% that analysts expected. The news has obviously hit gaming stocks hard, but it may not be time to panic just yet.
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Macau's volatility hits again
The gaming market in Macau is huge, about four times the size of the Las Vegas Strip; it's also surprisingly volatile. Month to month there are variations due to holidays, government interventions, construction, and myriad other reasons. The chart below shows how wild the swings can be on a monthly basis.
SMA = simple moving average. Macau's monthly gaming revenue from January 2017 to June 2018. Data source: Macau Gaming Inspection and Coordination Bureau. Chart by the author.
The three-month simple moving average on the chart above smooths out some of this volatility and shows what an upward trend gaming revenue has been on. If you look at that line, there's no reason to panic, and it's likely gaming revenue will recover quickly. But it's worth asking when you should get worried about the trend line turning south.
When should you worry?
While investors shouldn't panic too much over a single month, if the decline in gaming revenue continues sequentially, there would be reason to worry. Below is the same data as the table above, but zoomed out to go from January 2013 until today.
In early 2014 revenue started to decline, but it was seen as normal volatility at the time. Except that time around, the drop in gaming revenue didn't stop until mid-2015 -- and Macau still hasn't recovered to anywhere near those highs.
SMA = simple moving average. Macau's monthly gaming revenue from January 2013 to June 2018. Data source: Macau Gaming Inspection and Coordination Bureau. Chart by the author.
What investors will want to watch for is the long-term trend in gaming revenue over the next few months. If gaming revenue remains in the $2.8 billion to $3.3 billion range it's been in since October 2017, I don't see any reason to worry about gaming stocks. But if revenue begins to drop, it would be cause for concern among investors.
Who gets hit by Macau's drop in gaming revenue
Sinking gaming revenue could be a double whammy for gaming stocks thanks to a building boom taking place there. Wynn Palace, Las Vegas Sands' The Parisian, MGM Cotai, and an expansion of Melco Resorts' City of Dreams have all been completed in the last two years, expanding supply in Macau. If that's followed by a decline in revenue, it would stretch everyone thin.
It's also no surprise that companies that are the most dependent on Macau's gaming market were hit hardest. Melco Resorts is almost entirely dependent on Macau for revenue, and Wynn Resorts generates well over two-thirds of its revenue in Macau, so they dropped the most on Monday. Las Vegas Sands gets about half of its revenue in Macau, and MGM Resorts is the least dependent on Macau, with less than a quarter of its revenue coming from the region right now.
I think the disappointing June numbers were part of the market's normal volatility, and not yet a reason for gaming investors to panic. But keep an eye on trends over the next few months, because conditions can change quickly in the world's biggest gaming market.
