Light & Wonder: Initiating Coverage as EGMs Rule the Roost

We initiate on Light & Wonder LNW 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.

We expect it will prove difficult for Light & Wonder to capture material and maintainable share in the electronic gaming machine market. However, we do not expect the firm to cede share to smaller players either, as its research and development 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 social casino, iGaming, and EGMs. R&D investment can be leveraged to drive game performance across all remaining business units. R&D is the lifeblood of any electronic gaming manufacturer, especially given a trend to more rapidly changing technology. Although insufficient to warrant an economic moat, continuous product development allows Light & Wonder to maintain game quality and differentiate products from lower-end competitors.