CNBC Investing Club

Why we think the drop in this casino stock is a buying opportunity

A worker cleans an escalator on Las Vegas Boulevard in Las Vegas, Nevada, U.S., on Tuesday, March 17, 2020.
Joe Buglewicz | Bloomberg | Getty Images

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Wynn Resorts is trading lower after the company announced the SPAC deal that would have taken Wynn Interactive public has been terminated.

The merger was announced in May and would have valued Wynn's online gaming division at $3.2 billion. The business combination would have provided Wynn Resorts with $640 million in cash to be used on company operations and support new growth initiatives at Wynn Interactive. 

The decision to nix the deal looks to be related to the change in strategic direction management outlined this past week on the third-quarter earnings call.

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"In light of elevated marketing and promotional spend in the sports betting industry, we are pivoting our user acquisition efforts to a more targeted ROI-focused strategy. In so doing, we expect the capital intensity of the business to decline meaningfully beginning in the first quarter of 2022," Wynn Interactive CEO Craig Billings, who will succeed Matt Maddox as CEO of Wynn Resorts next February, said in a statement Friday.

Taking a step back for a moment, we just have to say that we applaud this disciplined approach at Wynn Interactive. Competition in the sports gambling industry is currently so intense, with operators spending on marketing and promotions like mad, driving up the cost of acquisition. This growth at any cost philosophy is unproven, and we prefer to be part of a business that wants to create a sustainable and profitable business model.

WYNN is a buy on this dip

Shares might be trading lower Friday because Wynn Interactive is no longer locked into the $3.2 billion valuation, but we take no issue with this new development. If Wynn Interactive's capital intensity is declining and the business no longer requires the significant cash infusion, why should Wynn Resorts give up part ownership of the business?

We think Wynn Resorts is a buy on today's weakness. In addition to online gaming's disciplined, ROI driven focus, we like how Wynn's Las Vegas and Boston properties delivered record adjusted EBITDA in the quarter thanks to pricing power and market share gains. Patience and a stomach for volatility are still required here due to ongoing restrictions in Macao, but we still believe regulatory concerns in the region will prove to be overblown too.  

DIS, PYPL are also buys

As for the other two names in the portfolio that reported this week, we remain steadfast in our belief that the post-earnings pullbacks in Disney