Recurring Revenue And iGaming Expansion Will Support Balanced Long Term Performance

Catalysts

About Light & Wonder

Light & Wonder develops and distributes cross platform gaming content and technology for land based, social and online casino markets.

What are the underlying business or industry changes driving this perspective?

• Although recurring revenue already represents 69% of total sales and supports robust cash generation, a slowdown in adding new gaming operations units or weaker pricing on wide area progressive titles could cap future growth in high margin, high flow through revenue and limit further expansion in net margins and earnings.
• While iGaming wagers across the network are growing and first party titles now dominate top game rankings, intensifying competition, additional regulatory constraints in new markets and execution risk around international rollouts such as the Philippines could moderate the pace of digital revenue growth and temper incremental margin gains.
• Despite the early success of Grover and its integration into Light & Wonder’s technology stack, delays in opening new charitable gaming jurisdictions, slower than planned scaling in Indiana and higher integration costs could mean the installed base grows more gradually than expected and dampen upside to consolidated revenue and free cash flow.
• Although the shift toward direct to consumer distribution in SciPlay is lifting ARPU and margins, ongoing pressure at legacy titles like Jackpot Party, potential headwinds from changing online gaming rules and higher user acquisition spending to reaccelerate growth may constrain segment level revenue growth and limit contribution to consolidated earnings.
• While the company is launching multiple new cabinets and leveraging a shared R&D engine across land based and digital platforms, hardware tariffs, elevated capital intensity and any softening in replacement demand after accelerated depreciation incentives roll off could compress returns on content investment and slow improvement in AEBITDA and net income.

Assumptions

This narrative explores a more pessimistic perspective on Light & Wonder compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Light & Wonder's revenue will grow by 6.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 12.4% today to 13.3% in 3 years time.
• The bearish analysts expect earnings to reach $524.3 million (and earnings per share of $7.31) by about December 2028, up from $399.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $813.1 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, down from 20.2x today. This future PE is lower than the current PE for the US Hospitality industry at 31.4x.
• The bearish analysts expect the number of shares outstanding to decline by 3.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.03%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Recurring revenue already represents 69% of consolidated sales and is growing at mid-teens rates, while AEBITDA and adjusted NPATA are increasing at double digit percentages. If this high quality earnings mix continues to deepen, the share price could rerate upward as investors assign a higher multiple to increasingly visible revenue and expanding net margins.
• The iGaming business delivered record revenue growth of 16% year on year with wagers up 23% to $28 billion and margins expanding by 800 basis points. If this structurally higher growth and margin profile in digital continues, long term earnings and free cash flow could rise faster than expected and drive a higher equity valuation.
• Grover’s installed base has surpassed 11,250 units with over $40 million of quarterly revenue and Indiana and other new jurisdictions set to scale from 2026. If charitable gaming expansion and cross selling of Light and Wonder titles into this fleet outperform, recurring revenue, AEBITDA and cash generation could exceed current expectations and lift the share price.
• The company is aggressively investing in R and D and new platforms such as Carbon and Lightwave, while successfully launching multiple high performing franchises across land based, social and iGaming channels. If this cross platform content engine sustains share gains and pricing power, long term revenue growth and operating margins could prove structurally higher than implied by a flat share price view.
• Management is executing sizable share repurchases, has reduced interest costs by refinancing bonds and targets leverage within a disciplined range. If ongoing buybacks and balance sheet optimization continue to shrink the share count and enhance earnings per share and free cash flow per share, the equity value could compound even if headline revenue growth merely tracks current trends.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Light & Wonder is A$139.76, which represents up to two standard deviations below the consensus price target of A$177.72. This valuation is based on what can be assumed as the expectations of Light & Wonder's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$225.91, and the most bearish reporting a price target of just A$139.76.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $3.9 billion, earnings will come to $524.3 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of A$151.41, the analyst price target of A$139.76 is 8.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.