Light & Wonder Lacks Competitive Advantages to Warrant an Economic Moat

Light & Wonder has significantly simplified its business by divesting noncore lottery and sports betting assets. It is now a more focused entity, cut in much the same image as dominant competitor Aristocrat, with operations across the social casino space, iGaming, and electronic gaming machines. Most of Light & Wonder's revenue—around two thirds in 2022—is derived from land-based gaming. Within this segment, revenue comes both from leased machines, which attract a fee-per-day or percentage of wagered amount, and outright sales. To maintain share over the long run in the fiercely competitive EGM market, manufacturers need to consistently deliver new, high-quality games that keep consumers engaged and maximize revenue for gaming venues. This requires continuous spending on research and development. Relative to Aristocrat, Light & Wonder spends a lower percentage of revenue on R&D. As a result, we expect it will be difficult to capture material, maintainable share in the EGM market. However, we do not expect Light & Wonder will cede share to smaller players either, as its R&D spending is multiples of most of its smaller competitors.