Light & Wonder ‘Dragon Train’ Decline Overdone, Stock Cheap, Says Analyst
Shares of Light & Wonder (NASDAQ: LNW) plummeted last week after a court decision related to its "Dragon Train" slot machine series, but one analyst contends that the drop was excessive and that the stock is trading below its value.
In a recent report to clients, analyst David Bain from B. Riley started coverage of the gaming equipment producer with a “buy” rating and a price target of $120. This suggests a possible increase of roughly 25% from the close on Tuesday. Bain perceives the stock as significantly undervalued compared to past standards and its competitors.
"Despite peer growth outperformance, a significantly de-levered balance sheet, and strong return of capital policies, LNW’s enterprise value/earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) valuation is ~40% below its closest peer and 13% below its own historical valuation average,” wrote Bain.
The stock dropped last week when the US District Court for the District of Nevada issued a preliminary injunction to Aristocrat Gaming, which claimed that Light & Wonder’s “Dragon Train” slots relied on trade secrets from the Australian company’s “Dragon Link” games.
Light & Wonder’s ‘Dragon Train’ Penalty Excessive
Despite their popularity, “Dragon Train” machines were projected to represent less than 5%, or $70 million, of Light & Wonder's anticipated 2025 EBITA of $1.4 billion — a projection the company maintained following the previously mentioned court decision.
That’s a minor percentage, and one that arguably strengthens Bain’s claim that the punishment experienced by the stock last week was excessively harsh. He mentioned that the company has reaffirmed its 2025 predictions and continues to prioritize returning capital to shareholders.
“After estimating a potential success range from forward mitigation efforts and including possible one-time damages and previously unanticipated capex, we calculate a ~$6/share negative impact from Dragon Train disruption,” added the analyst. “Importantly, LNW has at least twice publicly reiterated its CY25E $1.4B guidance since 9/23 and stated that share buybacks will remain a key corporate focus.”
In a video uploaded to Light & Wonder's investor relations site late last week, CEO Matt Wilson announced that the company is focusing on removing "Dragon Train" slots in North America and substituting those machines with its other games, many of which are favored by gamblers.
SciPlay Catalyst for Light & Wonder Stock
SciPlay, the social casino creator that Light & Wonder reconnected with last year after a 2019 spin-off, could be a undervalued driver for the parent company's stock in the long run.
Bain noted that while the overall social casino sector is stabilizing, SciPlay is expanding, and highlighted that the Light & Wonder division performs well against competitors.
“SciPlay’s CY23/1H24 revenue was up 16%/9%, versus social casino industry declines of 1.6%/3%. We expect SciPlay to continue to benefit from cross-platform resources/content, entrance into the larger casual gaming total addressable market, and ad tech,” concluded the analyst. “Further, SciPlay’s direct-to-consumer mix efforts doubled Q/Q to 12% of revenue in 2Q24. We calculate that a 30% D2C mix on CY25E SciPlay revenue, in line with industry leader Playtika Holding Corp., equates to an additional ~$25 million of recurring EBITDA (EBITDA margins to gain an estimated 300 bps).”
