Acquiring Grover Gaming And Investing In iGaming Will Strengthen Market Position

Key Takeaways

• Expansion into charitable gaming and new products aims to enhance revenue, diversify market presence, and strengthen leadership in North American and international markets.
  
• Resource reallocation and strategic investments in iGaming and first-party content are expected to boost net margins and revenue growth.
  
• Heavy investment in R&D and acquisition costs may strain cash flow, with regulatory changes and sector challenges potentially affecting iGaming revenue and profit margins.

Catalysts

Operates as a cross-platform games company in the United States and internationally.

• The acquisition of Grover Gaming's charitable gaming business, with its high barriers to entry and a recurring revenue model, is expected to enhance Light & Wonder's revenue and net margins, leading to diversification and expansion into a lucrative market segment.
  
• With the ongoing development of new gaming products and expansion into additional jurisdictions, the company aims to maintain its leadership position in North American and international markets, potentially driving higher revenues and net margins over time.
  
• SciPlay's strategic investments in game development and direct-to-consumer platforms are enhancing user engagement and monetization, suggesting potential improvements in revenue and earnings growth.
  
• The decision to discontinue and divest the live casino business is intended to reallocate resources to more promising segments, which is likely to improve net margins by focusing on higher return sectors like iGaming and first-party content.
  
• Strengthened R&D efforts and content roadmaps, including the integration of content across different segments under unified leadership, are anticipated to drive revenue growth and enhance margins through operational efficiencies and innovative product offerings.

Light & Wonder Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Light & Wonder's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 17.2% in 3 years time.
• Analysts expect earnings to reach $683.4 million (and earnings per share of $8.4) by about March 2028, up from $336.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $797.8 million in earnings, and the most bearish expecting $578.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.0x on those 2028 earnings, down from 26.0x today. This future PE is lower than the current PE for the US Hospitality industry at 23.3x.
• Analysts expect the number of shares outstanding to decline by 6.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.81%, as per the Simply Wall St company report.

Light & Wonder Future Earnings Per Share Growth

Risks

• Light & Wonder's reliance on high investment in R&D and product development may strain operational cash flow if expected returns do not materialize, impacting profit margins.
  
• The upcoming acquisition of Grover Gaming, while promising, involves upfront costs and potential integration challenges that could affect earnings if synergies are not realized as projected.
  
• Despite strong performance in North America, potential adverse changes in gaming regulations could affect iGaming revenue, a growing segment of their business.
  
• Discontinuation and divestment of the Live Casino business indicate sector challenges, suggesting possible setbacks in market share and impacting projected revenue from iGaming.
  
• The need to maintain a competitive edge requires continuous high expenditure on user acquisition, potentially squeezing net margins if revenue growth does not meet expectations.

Valuation

• The analysts have a consensus price target of $114.995 for Light & Wonder based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $144.0, and the most bearish reporting a price target of just $80.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.0 billion, earnings will come to $683.4 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 8.8%.
• Given the current share price of $103.47, the analyst price target of $115.0 is 10.0% higher.
• 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.