Why Wynn Resorts Could Be a Long-Term Winner

At a cursory glance of Wynn Resorts (WYNN) – the popular developer and operator of high-end hotels and casinos – the red ink doesn’t exactly provide much in the way of confidence. Posting a mediocre performance for Tuesday, WYNN stock is down nearly 25% on a year-to-date basis. Fundamentally, the situation doesn’t look any better, though this investment idea could be appealing for forward-thinking market participants.

Let’s get the bad news out of the way first. Against a broader framework, economic pressures are likely to weigh heavily on travel sentiment. True, The Washington Post reported that demand for travel defies the negative implications of rising inflation. However, with the consumer price index rising 9.1% in the trailing 12 months since June 30, at some point, households must make adjustments.

Further, with Wynn Resorts occupying the higher end of the pricing spectrum, WYNN stock faces a natural roadblock. Under an inflationary cycle, it’s easier for consumers to adjust down their lodging requirements if they insist on keeping the actual going-on-vacation component sacrosanct.

For Wynn’s business specifically, the company is a long way from its heyday. While its first quarter of 2022 presented some encouraging details – such as revenue rising 29% on a year-over-year basis – the current trailing-12-month revenue is well off from 2019’s result of $6.6 billion.

Still, some traders see the long-term potential in WYNN stock, especially if trading in the derivatives market is anything to go by.

Traders Placing Bullish Wagers on WYNN Stock

Following the close of the Aug. 9 session, WYNN stock racked up enough trading action to list among the unusual options activity for the day. Market participants piled into the $74 calls with an expiration date of Aug. 12 (this Friday). Volume reached 3,006 contracts against an open interest reading of 143.

Two factors stood out immediately. First, with WYNN stock closing at $66.03 in the open market, shares are slightly more than 12% off from being at the money. With only a few days remaining until expiration, it’s a gamble that WYNN will rise up in time.

Second, the bid-ask spread as represented by the midpoint price (17 cents) is a staggering 29.4%. Frankly, unless market participants are deploying sophisticated tactics, this is a terrible margin to natively accept. As well, it strongly indicates a lack of liquidity for this particular trade.

Setting aside the specifics of the above transaction, the fact that traders are interested in WYNN calls is significant. Primarily, Wynn’s put/call open-interest ratio features bearish implications at 1.10. Typically, given the upward bias of the equities sector, the common demarcation for the put/call ratio is 0.7. Anything higher suggests more traders are buying puts than calls. Therefore, a figure of 1.10 suggests substantial pessimism.

Nevertheless, for contrarian investors, WYNN stock is appealing if you look into the granularity.

All Eyes on Macau

Although Wynn reported solid results for its Q2 2022 earnings report, the glaring spotlight focused on total operating revenues, which at $908.8 million slipped more than 8% against the year-ago quarter. The culprit was the Macau properties, which fell mainly due to draconian COVID-19 restrictions.

However, the important factor to keep in mind is the behavioral differences between Wynn’s Las Vegas patrons versus their Macau counterparts. Yes, Macau-based properties disappointed this time around. However, during the disruptive Q2 period, casino sales (at Wynn Palace and Wynn Macau) represented 57.3% of total Macau operations.

In sharp contrast, casino sales at Wynn’s Las Vegas operations only represented 24.1% of total operations there. Dominating proceedings in Q2 was the food and beverage segment. However, the problem with this allocation is that casinos depend on games of chance, much like car dealerships depend on selling cars.

Therefore, the Macau operations are significant, not just to Wynn but other casino operators. They know that Macau patrons visit casinos to gamble, where of course the house has an edge.

Another problematic angle regarding the Las Vegas operations featuring a higher revenue tally toward non-casino ventures is their one-off nature. While a slot machine can potentially rack up thousands of dollars per every hour, a room can only be rented out to one guest at a time. Similarly, a lobster dinner can only feed one person.

Fortunately, once Macau – which follows China’s pandemic-related mandates – relaxes its COVID-19 restrictions, gambling sentiment can once again return to “Vegas of the East,” boding well for WYNN stock in the long run.

Worth a Shot for the Speculator

To be fair, if the global economy suffers a massive recession, all bets are off until the overriding bearish element is resolved. Therefore, no one should enter WYNN stock with expectations of guaranteed upside. Nevertheless, the fundamental difference between Macau patrons versus their Vegas counterparts implies that once pandemic-related restrictions are lifted, Wynn could get back in the business of winning again.

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