Melco Resorts & Entertainment (MLCO) released its latest quarterly earnings, showing a clear jump in both revenue and net income compared to the same period last year. The company’s improving profitability has caught investor attention.
See our latest analysis for Melco Resorts & Entertainment.
The upbeat earnings report appears to have powered strong momentum in Melco Resorts & Entertainment’s share price. The stock has climbed 11% over the past month and surged 64% so far this year. Although the five-year total shareholder return is still well below its prior highs, recent gains suggest a shift in sentiment as the company’s fundamentals improve and confidence returns.
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Given the sharp rally and recent earnings surprise, investors are now weighing whether Melco Resorts & Entertainment remains undervalued or if the market has already factored in its future growth potential. Is there still a buying opportunity, or has optimism run ahead of reality?
At a price-to-earnings (P/E) ratio of 34x, Melco Resorts & Entertainment’s valuation is notably higher than the industry average. This makes the stock look expensive at the latest close of $9.06 despite recent growth.
The P/E ratio measures how much investors are willing to pay per dollar of company earnings. It is a widely watched indicator for hospitality companies because profits can fluctuate significantly in this sector due to shifting consumer demand and economic cycles.
While Melco’s P/E ratio is higher than the U.S. Hospitality industry average of 21.4x, it is still beneath the peer group average of 40.2x. This suggests the market is pricing in robust future earnings growth and a turnaround in profitability, but perhaps not to the same degree as its closest rivals. The fair price-to-earnings ratio is estimated at 33.3x, not far from Melco’s current multiple, which could mean future re-rating potential is limited.
Explore the SWS fair ratio for Melco Resorts & Entertainment
Result: Price-to-Earnings of 34x (OVERVALUED)
However, slower revenue growth or a sudden dip in profitability could challenge the optimism that has been driving Melco Resorts & Entertainment’s recent share price rally.
Find out about the key risks to this Melco Resorts & Entertainment narrative.
Looking beyond the price-to-earnings ratio, our DCF model estimates Melco Resorts & Entertainment’s fair value at $21.84, which is 58.5% above its current share price. This approach suggests the market may be underestimating Melco’s long-term cash flow prospects. Is the stock an overlooked opportunity?