Recurring Revenue And iGaming Expansion Will Reshape This Gaming Content Leader

Catalysts

About Light & Wonder

Light & Wonder develops and distributes casino gaming content, systems and platforms across land based gaming, social casino and real money iGaming.

What are the underlying business or industry changes driving this perspective?

• Expanding recurring revenue, now 69% of consolidated revenue, and continued installed base growth in North American gaming operations, including Grover, support more predictable cash flows that can benefit consolidated revenue and AEBITDA margins over time.
• The integration and scaling of Grover’s charitable gaming footprint, with over 11,250 units and entry into new states such as Indiana, broadens the installed base in a regulated niche that can support higher recurring revenue and free cash flow.
• Content franchises performing strongly across channels, such as Huff N’ Puff, Ultimate Fire Link, Quick Hit Slots and 88 Fortunes, align with the ongoing shift toward branded, cross platform play and can support growth in revenue per unit, iGaming AEBITDA margins and social monetization metrics like ARPDAU and ARPPU.
• iGaming growth in regulated markets, supported by first party content where 7 of the top 10 OGS titles are in house games, and expansion into new jurisdictions such as the Philippines and Michigan, is tied to rising digital wagering volumes and can support higher digital revenue and iGaming AEBITDA margins.
• Scaling direct to consumer in SciPlay, now at 20% of segment revenue with a target of 30%, reduces platform fees and aligns with higher digital spend per user, which can support net margins, AEBITDA and earnings even if overall social casino revenue is growing gradually.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Light & Wonder's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.4% today to 17.0% in 3 years time.
• Analysts expect earnings to reach $682.7 million (and earnings per share of $9.53) by about January 2029, up from $399.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $816.8 million in earnings, and the most bearish expecting $610.1 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 17.0x on those 2029 earnings, down from 20.8x today. This future PE is lower than the current PE for the US Hospitality industry at 30.9x.
• Analysts expect the number of shares outstanding to decline by 3.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.02%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Recurring revenue is already a large share of the business at 69% of consolidated revenue. If game performance weakens or installed base growth slows across North American gaming operations and Grover over time, the company could see more muted revenue expansion and less support for AEBITDA and earnings growth.
• The social casino segment depends heavily on a handful of mature titles such as Jackpot Party and Gold Fish. Management is already working to stabilize these games, so if player engagement or monetization in these older franchises keeps trending lower, that could weigh on digital revenue, SciPlay margins and consolidated earnings.
• iGaming and charitable gaming rely on supportive regulation and timely approvals in markets like Indiana, Michigan and the Philippines. Delays, tighter rules or slower than expected rollout of new markets could limit the long term contribution these channels make to revenue growth and AEBITDA margins.
• Higher tariffs and a shift away from pre tariff inventory are expected to create a mid to high single digit million dollar quarterly AEBITDA headwind. If price increases or cost savings do not fully offset this over several years, the gaming segment margin, free cash flow and net income could be pressured.
• Leverage sits at 3.3x net debt to AEBITDA after the Grover acquisition and substantial share repurchases of about 19.9 million shares. If interest costs rise further, refinancing terms worsen or cash generation falls short, the company may have less room to keep buying back shares or investing at the same pace, affecting earnings per share and long term equity value.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of A$177.72 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 A$225.91, and the most bearish reporting a price target of just A$139.76.
  
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $4.0 billion, earnings will come to $682.7 million, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of A$156.17, the analyst price target of A$177.72 is 12.1% higher.
  
• 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.