Emboldened by a nimbler business structure and a healthy allocation for research and development, Light & Wonder’s (NASDAQ: LNW) stock holds the potential for significant investor gains. This viewpoint comes from the desk of Morningstar analyst Angus Hewitt. Given his recent examination of the gaming device manufacturer, he suggests a promising price target of $87 for the share. This suggests an upside of approximately 21% from the present level, despite the stock having dipped 7.33% over the preceding week.
According to Hewitt, while Light & Wonder may not dethrone its primary competitor, Aristocrat Leisure, it should stand its ground against other smaller competitors. Light & Wonder’s decision to sell nonessential lottery and sports betting assets has effectively simplified its business structure, mirroring that of Aristocrat’s.
Light & Wonder’s business operations now span across social casino, iGaming, and electronic gaming machines (EGMs), thereby consolidating its market position. With Aristocrat and International Game Technology (NYSE: IGT), Light & Wonder is part of the dominant force controlling nearly 80% of the land-based casino slot machine market in North America.
In 2021, the firm, formerly known as Scientific Games, jettisoned its lottery and sports betting segments, securing an impressive $7 billion in the process. These transactions not only significantly reduced its debt but also clarified the investment prospects in Light & Wonder. It enabled the company to reinvest in rapidly growing sectors such as iGaming, supporting increased R&D efforts.
Maintaining a market share in the highly competitive EGM market requires delivery of innovative, high-quality games that keep consumers engaged, Hewitt notes. This in turn necessitates ongoing expenditure on research and development.
At present, Light & Wonder allocates a smaller proportion of its sales towards R&D compared to Aristocrat, yet it surpasses IGT in this domain. Last month, the firm announced the future acquisition of the 17% stake in a social casino developer it had yet to own. We expect this to pave the way for the return of the company it divested in 2019, with the deal expected to finalize in the year’s final quarter.
The prowess of Light & Wonder in pursuing effective R&D is crucial when evaluating its stock potential. This is particularly the case during times when slot sales are stagnant compared to 2019 figures, yet there is a demand for upgrade by casino operators, signifying the potential for growth.
Investment in R&D ensures a continuous string of new products, software developments, and platform enhancements that help stimulate demand and distinguish them from competitors, Hewitt believes. Investment consistency over the long term is key to the enduring success of any gaming machine manufacturer.
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