Aristocrat Leisure: Shares Are Close to Fair Value

Aristocrat ALL shares are trading at a slight discount to our unchanged AUD 43 fair value estimate, after recovering strongly from lows of near AUD 30 at the beginning of 2023. We think the market is now appropriately balancing the firm’s dominance in land-based gaming against slowing tailwinds in Aristocrat’s digital businesses. We estimate Aristocrat’s highly popular and profitable gaming machine titles, which underpin its narrow economic moat, will allow the firm to continue to capture share in both outright sales and leased machines in the key North American market.

Aristocrat is the dominant player in a consolidated market. We estimate the three major players—Aristocrat Leisure, no-moat-rated Light & Wonder, and International Game Technology—together command the vast majority of North American outright sales and a similar proportion of leased machines. However, the dominance of the three major players does not imply a rational oligopoly. The majors compete fiercely with each other, and the durability of the remaining minority share indicates smaller manufacturers are still able to carve niches, at least for a while, despite considerably lower research and development expenditures.

We don’t expect the competitive environment to ease. IGT’s global gaming businesses are set to receive renewed attention as the firm eyes potential strategic options, such as a sale or spinoff. Similarly, Light & Wonder is a more focused operation with the demerger of its sportsbetting and lottery businesses. Light & Wonder is now cut in much the same image as Aristocrat, with operations across the social casino space, iGaming, and gaming machines. We think this makes strategic sense, as R&D investment can be leveraged to drive game performance across all business units. R&D is the lifeblood of any electronic gaming manufacturer, especially given a trend to more rapidly changing technology.