Posted on: September 25, 2023, 12:25h.
Last updated on: September 25, 2023, 12:25h.
Buoyed by a streamlined business model and a robust research and development budget, Light & Wonder (NASDAQ: LNW) stock could offer significant betting opportunities.
That’s the outlook provided by Morningstar analyst Angus Hewitt, who, in a new report on the gaming device manufacturer, set a price target of $87 for the stock. This suggests a potential rise of nearly 21% from current levels, despite the stock falling 7.33% in the past week. Although Light & Wonder may not capture significant market share from rival Aristocrat Leisure, the company should be able to defend its position against smaller competitors, according to the analyst.
Light & Wonder significantly simplified its business by divesting noncore lottery and sportsbetting assets,” wrote Hewitt. “Light & Wonder is now a more focused entity, cut in much the same image as dominant competitor Aristocrat, with operations across social casino, iGaming, and electronic gaming machines (EGMs).”
In North America, Aristocrat, Light & Wonder, and International Game Technology (NYSE: IGT) combine to control approximately 80% of the slot machine market in land-based casinos.
Simplified Light & Wonder Thesis Could Help Stock
In 2021, the company formerly known as Scientific Games sold its lottery and sports betting units, generating approximately $7 billion in cash.
Not only did these transactions significantly reduce debt, earning praise from Wall Street, they also simplified the investment thesis for Light & Wonder while allowing the firm to allocate some of the proceeds to faster-growing segments, including iGaming. This influx of capital also supported increased research and development efforts.
“To remain competitive in the EGM market in the long term, manufacturers need to consistently offer new, high-quality games that engage consumers and generate revenue for gaming venues,” added Hewitt. “This requires continuous investment in research and development.”
Currently, Light & Wonder allocates a smaller percentage of sales to research and development compared to Aristocrat, but it outspends IGT. However, Light & Wonder has made progress in iGaming and social casino. Last month, the company announced its acquisition of the remaining 17% stake in the social casino developer, paving the way for a reunion with the company it spun off in 2019. The deal is set to be finalized in the fourth quarter.
Why Light & Wonder R&D Matters
When evaluating the potential of Light & Wonder shares, the company’s ability to execute on research and development is crucial. This is especially important at a time when slot sales are stagnant compared to 2019 levels, but casino operators are looking to upgrade, suggesting room for growth.
Furthermore, consistent research and development efforts can mitigate some of the volatility associated with manufacturers finding success with one new game while struggling to gain traction with others.
“Investing in research and development is necessary to ensure a robust pipeline of new products, software developments, and platform enhancements, helping companies stimulate demand and differentiate themselves from competitors,” concludes Hewitt. “While the occasional hit game may involve an element of chance, we expect that the consistent development and release of popular titles will ultimately depend on long-term investment. This is crucial for the sustained success of any gaming machine manufacturer.”