Company Reports

We lift our fair value estimate for shares in no-moat Light & Wonder by 8% to USD 97/AUD 150 on the back of higher earnings forecasts for the core gaming business. Underlying 2023 EBITDA lifted 22% to USD 1.1 billion, about 3% ahead of our forecast. The firm enjoyed double-digit revenue and earnings growth across all segments by leveraging content research and development spending across gaming, SciPlay, and iGaming. R&D investment is necessary for a healthy pipeline of new products, software developments, and platform enhancements. However, we do not think Light & Wonder has carved an economic moat. While hit games can come down to chance, we do not believe Light & Wonder has garnered the appropriate intellectual property or brand assets to enjoy excess economic returns over the long run, particularly given stiff competition from market leader Aristocrat.

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.

Light & Wonder significantly simplified its business by divesting noncore lottery and sportsbetting assets. Light & Wonder 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 its main competitor 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.

We lift our fair value estimate for shares in no-moat Light & Wonder by 3% to USD 90 (AUD 140) following the release of third-quarter 2023 results. Revenue and profitability are tracking ahead of our previous forecasts for the first 9 months of fiscal 2023, with underlying EBITDA up 26% on the previous corresponding period to USD 815 million. We raise our 2023 underlying EBITDA forecast by 6% to USD 1.1 billion—a 19% increase on 2022. The increase in our estimates, together with the time value of money, lifts our valuation.

We initiate on Light & Wonder with a USD 87 (AUD 135) per share fair value estimate, a Morningstar Uncertainty Rating of High, and a Capital Allocation Rating of Standard. We do not think Light & Wonder benefits from an economic moat. While stringent regulatory licensing requirements in major markets create barriers to entry for new players, the market is already highly competitive, and we do not believe Light & Wonder has garnered the appropriate intellectual property or brand assets to enjoy excess economic returns. Our valuation implies a fiscal 2023 price/earnings ratio of 36 and an enterprise value/EBITDA of 11. Our discounted cash flow model uses a 7.8% weighted average cost of capital.

Light & Wonder significantly simplified its business by divesting noncore lottery and sportsbetting assets. Light & Wonder 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 its main competitor 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.