Share Buybacks, Global Expansion, And iGaming Innovations Promise Robust Growth

Key Takeaways

• Investment in R&D and innovation across both land-based and digital platforms, especially in the iGaming sector, indicates a forward-looking growth strategy.
  
• Expansion in global and adjacent gaming markets, supported by a diverse product offering, points to potential for increased market share and profitability.
  
• Diversifying into iGaming and direct-to-consumer platforms presents execution risks and potential margin pressures amid ambitious growth targets and dependency on key game franchises.

Catalysts

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

• The completed share repurchase program and the authorization of a new 3-year $1 billion buyback program underline investor confidence and a strong balance sheet, suggesting a potentially undervalued stock with expectations to boost future earnings per share through reduced share count.
  
• Continued double-digit consolidated revenue and AEBITDA growth, driven by diversified casino product portfolio and unique cross-platform strategy, indicate operational strength and market expansion capabilities that could lead to higher future revenues and earnings, enhancing stock value.
  
• Expansion in global gaming markets (e.g., North America, Australia, and Macau) and growth in adjacent markets (e.g., video lottery and historical horse racing), supported by a broad and diversified product offering, point to potential for increased market share and higher future sales and profits contributing to an undervalued stock.
  
• Strong momentum in SciPlay with consecutive revenue growth and increased market share, driven by operational efficiency and prudent user acquisition spending, suggests underappreciated growth aspects that could affect future profitability positively.
  
• Investment in R&D and innovation for both land-based and digital spectrums, particularly in the iGaming sector, signals a long-term growth strategy that could significantly impact future revenues and net margins, hinting at a currently undervalued stock based on growth prospects beyond the immediate financial horizon.

Assumptions

• Analysts are assuming Light & Wonder's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.9% today to 15.4% in 3 years time.
• Analysts expect earnings to reach $560.8 million (and earnings per share of $6.42) by about November 2027, up from $306.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $668.3 million in earnings, and the most bearish expecting $445.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.8x on those 2027 earnings, down from 29.7x today. This future PE is lower than the current PE for the US Hospitality industry at 24.3x.
• Analysts expect the number of shares outstanding to decline by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.34%, as per the Simply Wall St company report.

Risks

• The reliance on specific game franchises and the launch of new titles for revenue growth introduces a risk if these games fail to meet market expectations or become less popular over time, potentially impacting revenue and earnings.
  
• Legal and restructuring costs, as mentioned, could elevate operational expenses and negatively affect net margins if they continue or increase beyond current levels.
  
• The company's ambitious growth target towards 2025 relies heavily on market expansions and product launches that may face unforeseen challenges or delays, impacting revenue growth and earnings projections.
  
• The investment strategy in iGaming and direct-to-consumer platforms, while potentially lucrative, carries execution risk and may pressure margins in the near term if growth does not meet expectations or requires significant ongoing investment.
  
• External factors impacting the U.S. consumer market could influence gaming revenue and the willingness of operators to invest in new or replacement units, potentially affecting the company's revenue and growth momentum in a critical market segment.

Valuation

• The analysts have a consensus price target of $110.59 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 $76.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.6 billion, earnings will come to $560.8 million, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 8.3%.
• Given the current share price of $102.5, the analyst's price target of $110.59 is 7.3% higher. 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.