Wynn Resorts

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 2/5

Wynn Resorts is a developer and operator of luxury integrated resorts, primarily focused on high-end casino operations, along with related retail, dining, and entertainment offerings.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Wynn Resorts is a company that develops and operates luxury resorts. The company’s operations are divided into three primary segments: Macau, Las Vegas, and Encore Boston Harbor. Each segment offers high-end casino gaming, luxury hotel accommodations, dining, and retail experiences.

  • Macau: This segment includes Wynn Macau and Wynn Palace. These properties contribute to the majority of Wynn’s revenues and are designed for upscale clientele with high-end casino gaming, luxury hotels, and related amenities.
  • Las Vegas: The Las Vegas segment includes Wynn Las Vegas and Encore, both located on the Las Vegas Strip. These properties feature high-end casino gaming, luxury hotels, and a variety of dining and entertainment options.
  • Encore Boston Harbor: This property, located in Massachusetts, offers similar luxury casino and resort experiences as the other two segments, although it is on a smaller scale.

The business strategy is to provide a high-end, luxury experience with a focus on premium gaming and hospitality. The company aims to attract high-spending customers through exceptional service, premium amenities, and a focus on exclusivity. The company tries to differentiate by focusing on design elements in its facilities, and providing the most luxurious experience possible to the customers. The company is exposed to seasonality through holiday periods which see an increase in overall revenues.

Revenue Distribution

Wynn’s revenue is primarily generated through gaming activities (59% in the quarter ending September 30, 2024), as well as hotel rooms, food, and beverage sales, and other sources, each representing a portion of its revenue.

The most dominant revenue stream is from the casinos, and its performance is tied to the gaming market’s health.

  • Macau is the main contributor to the overall revenues, making the company sensitive to the geopolitical situation in the region.
  • Las Vegas is also a major part of its revenue.
  • Other operations include Wynn Interactive which provides online digital gaming. The revenue mix is constantly changing and is heavily influenced by the global macroeconomic and geopolitical environment.

The global casino and hospitality industry is highly competitive. The industry faces a high level of competition from other operators in different parts of the world. The industry is susceptible to external factors, like the current economy, and geopolitical crises.

  • Emerging economies, especially in Asia, have driven growth in the casino market.
  • Regulations and government oversight have had a major influence on the industry.
  • Online gaming is becoming increasingly popular.
  • The growth of mass-market segments has also increased, bringing in a new customer base.

Wynn Resorts differentiates itself by focusing on the high-end luxury market and offering an experience different from the competition. The company tries to differentiate from competitors through the luxury and experience that it provides.

Financials

  • Latest Earnings: Wynn’s latest quarterly results for the period ending September 30, 2024 show a consolidated operating revenue of $1.6 billion, a net income attributable to Wynn Resorts of -$117 million and a net income attributable to Wynn Macau Limited of $14.8 million.

  • It can be seen from the latest results that it has a high reliance on the Macau operations.

  • Income Statement: Wynn’s income statement shows high levels of revenue as a luxury resort operator, but the operations are also very expensive, so you can see this from high operation expenses as well.
  • The company has large interest expenses from its high debt.

  • It reported large net losses due to a large impairment of Wynn Interactive.

  • Balance Sheet:
  • The company is highly leveraged with debt (approximately $11 billion), and therefore, is very sensitive to changes in the interest rate market.
    • It has a decent amount of cash available (around $2.7B), but most of it is restricted for certain operations.
  • Cash Flow:
    • The company had an operating cash flow of approximately $800 million in the nine months of 2022. This is partially offset by large capital expenditures and repayment of debt that are also present in the cash flow statement.
    • The company has negative cash flows from investing activities and from financing.

Moat Analysis

Wynn Resorts does not have a wide economic moat. While it excels at delivering high-end customer experiences, that is a strength of the company rather than a source of an economic moat.

Here’s a breakdown:

  • Intangible Assets: While Wynn has developed a strong reputation for providing luxury experiences, they are not unique from the competition. The strength of the brand is a differentiator, but not a significant enough moat, because they can be replicated.
  • Switching Costs: There are little to no switching costs for customers, as they often choose different resorts each time they travel. Therefore, there is little to no pricing power.
  • Network Effect: There is no strong network effect for Wynn’s properties. Each resort typically operates independently and attracts a relatively local clientele. The network effect does not play a big role in its operations.
  • Cost Advantages: Wynn does not have a cost advantage relative to its peers. Its properties are designed to be luxurious, and thus the company doesn’t have much control over its operating costs.

Moat Rating: 2 / 5 The moat is rated as a weak moat, because although the company has differentiated from the rest in the niche sector of the luxury market, it lacks the long term structural advantages that a company needs to be considered having a wide moat.

Risks

Wynn is susceptible to a number of risks that could harm its moat and operations:

  1. Economic Downturns: The company’s high dependence on customer spending at its casinos makes it vulnerable to economic downturns, and its high debt levels also put it in danger of bankruptcy if a recession hits the industry hard.
  2. Geopolitical Risks: Since the majority of Wynn’s earnings are from Macau, it makes the company incredibly sensitive to political situations within and around China. Any government intervention can lead to massive changes for their revenues.
  3. Increased Competition: As the market becomes more competitive, it is possible that competitors may try to replicate or better Wynn’s offerings, eroding the company’s competitive advantage.
  4. Regulatory Changes: Changes in regulations regarding gambling, labor, or operations could affect the company’s profitability and business model. Regulations related to gaming are susceptible to rapid changes. The company may also lose its ability to conduct gaming in the areas it operates if the government pulls its license for any reason.
  5. Execution Risk: For a company such as Wynn that creates unique experiences, they face the risk that the quality and perception of those operations falls. This may result in a large drop in visitors.
  6. Debt Burden: The company’s large debts make it more difficult to raise future capital and make it more prone to bankruptcy in case of economic downturns.

Business Resilience

  • Wynn Resorts exhibits resilience through its established presence in the luxury resort and casino industry. The brand strength also provides some staying power and repeat clients.
  • However, its high debt and reliance on specific geographical regions make it more vulnerable to external pressures. It does not appear to be as defensive as it should be, given the presence of some big macro-level risks in the current economy.
  • While its luxury focus helps to insulate its business from some level of economic effects, the fact that its core business relies on discretionary spending makes it very vulnerable to a macroeconomic downturn.

Understandability Rating

The business is quite complex and difficult to understand and to forecast accurately. The company has large operations across several regions with varying rules and business dynamics.

Understandability Rating: 2 / 5

  • While the core concept of its business is simple, understanding the various financial and operational metrics, and especially how that affects its earnings requires considerable effort. Predicting the company’s future earnings is quite difficult and would require a large research team.
  • Its operations span several geographical areas (Macau, Las Vegas, Boston) making the business hard to understand.
  • Its financial statements are extremely complex and the management has often relied on non-GAAP numbers, which don’t provide a clear picture of the company.

Balance Sheet Health

Wynn has a high degree of debt on its books ($11 billion). Balance Sheet Health: 2/5 * This makes it difficult for the company to undertake new projects, and more vulnerable to a bankruptcy should they suffer any financial setbacks. * Its high interest expenses are also a negative factor. * The company has also a sizeable amount of deferred tax liabilities which can put pressure on the equity section of the balance sheet if it does not do well, as that will reduce its tax shields.

### Recent Concerns and Controversies

  • One of the major concerns for investors has been the company’s high debt burden, which makes it extremely susceptible to interest rate changes. In the latest earnings call, the company has reiterated its commitment to reducing debts but has not yet outlined any particular strategic action to reduce debts drastically.
  • Another concern stems from China’s economic slowdown and any policy restrictions that might be introduced in the Macau region, which is its biggest revenue generator. This makes the company vulnerable to changes in the Chinese market.
  • The company has also been involved in several lawsuits in the recent past which are a concern for the company’s legal obligations and possible financial losses.
  • The recent earnings have missed consensus estimates by a considerable margin. It is becoming less clear when the company will reach a point of full recovery and has led to doubts among investors regarding management’s future plans.
    • The company has tried to reassure investors that, once the new regulations are passed in Macau, it can get back to its previous level of profitability.

Other Relevant Information

  • The management has recently begun talking about its focus on the development of its Wynn Al Marjan resort in UAE. This is planned to be a massive project, and the company hopes to achieve a wide-moat in a completely new industry through this resort, thereby diversifying its revenue streams away from Macau and the United States.