While it’s not your typical tech stock, cross-platform global games company, Light & Wonder (ASX: LNW) could be primed to bounce higher despite Aristocrat Leisure’s (ASX: ALL) lawsuits in the Australian and United States courts against its rival poker machine maker.
Recent market weakness aside, both Light & Wonder and Aristocrat are down around 17% and 8% respectively due to the current legal overhang.
Court action
Aristocrat alleges that the Caledonia-backed dual-listed gaming giant engaged in a campaign to copy its most popular game, Dragon Link - and confuse customers.
Aristocrat, which is no stranger to court action, also alleges that former employees who now work for Light & Wonder purloined trade secrets - related to the Jewel of the Dragon (JOD) and Dragon Train (DT) games.
An Australia court has already denied a request by Aristocrat Leisure for an interlocutory injunction regarding Light & Wonder's Dragon Train game. This effectively, allows Australian venues to keep the Dragon Train game on their floors.
Meanwhile, Light & Wonder is trying to have its rival’s allegations thrown out of a U.S. court, on the grounds that they’re part of a concerted effort to undermine the release of its new games.
Best estimates suggest that US$70-85 million in earnings globally, which JOD and DT generated over their lifetimes, is an amount Light & Wonder could be found liable for.
Given that Bell Potter forecasts US$1,465 million in FY 2025 and US$1,654 million in FY26, the broker doesn’t see success in the courts by Aristocrat as a major show-stopper for Light & Wonder.
Meanwhile Light & Wonder has also reaffirmed its FY25 guidance of $1.4 billion in operating profit.
Like Bell Potter, L1 Capital believes strong earnings momentum across its land-based gaming, SciPlay and iGaming business segments has set the company up for double-digit earnings per share (EPS) growth annually over the medium term.
Light & Wonder looks undervalued
In light of Light & Wonder’s current share price – down 17% since late February – the broker believes Light & Wonder has been oversold relative to its 12-month upside.
The stock is currently trading at a 25% discount to the broker’s 12-month target price of $197.
In a recent client note, the broker suggested that the market prices in a worst-case scenario regarding legal matters with Aristocrat.
“We expect LNW's cross-platform strategy and leading scale will produce a portfolio of high-performing games in both land-based and digital markets,” the broker noted.
“We continue to expect improvement in product quality to strengthen LNW's competitive advantage, supporting market share gains.
"At 10.8x NTM EV/EBIT(A), LNW trades at a ~37% discount to close comp ALL.”
Aristocrat recently sued a cluster of gaming groups from Gibraltar, Malta and the British Virgin Islands over their versions of Buffalo, a popular online pokie game.
Grover Gaming acquisition
Light & Wonder recently paid $1.05 billion for the charitable gaming assets of Grover Gaming (Grover Charitable Gaming) and G2 Gaming - a provider of digital scratchies – which implies a 7.7-time multiple based on Grover’s adjusted earnings.
Light & Wonder plans to fund the acquisition with a combination of incremental debt financing and existing cash, and expects its net debt leverage ratio to remain within the target range of 2.5x to 3.5x, post buyout.
ASX bound
Light & Wonder has hired trans-Tasman bank Jarden as financial adviser and started marketing the acquisition to clients earlier this week.
Following this acquisition, the company has also considered a dual listing on the Nasdaq and the ASX, or a sole ASX listing.
This outcome could be a milestone for the ASX given that Light & Wonder – which trades on the ASX under a CHESS Depository Interest (CDI) – is capitalised at US$8.97 billion on the Nasdaq.
Best estimates suggest that around 30% of Light & Wonder’s total shareholding is currently on the ASX.
Light & Wonder has a market cap of $3.2 billion; the share price is up 7.9% year to date.
