Gaming Tech Earnings Outlook: Solid Trends, Encouraging M&A Signs, Says Analyst

Posted on: July 23, 2024, 03:19h. 

Last updated on: July 23, 2024, 03:19h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Second-quarter earnings season is rolling along and gaming technology companies will soon take their turns in the earnings confessional. The trends are expected to be solid though not spectacular.

IGT
A bank of Wheel of Fortune slot machines. An analyst sees a mixed Q2 earnings season ahead for gaming tech companies. (Image: TheStreet.com)

In a note to clients previewing upcoming reports from gaming device manufacturers, Stifel analyst Jeffrey Stantial said Light & Wonder (NASDAQ: LNW) and PlayAGS (NYSE: AGS) are likely to beat estimates for the June quarter while International Game Technology (NYSE: IGT) should meet Wall Street forecasts. Everi (NYSE: EVRI) could miss estimates. IGT is merging its global gaming and PlayDigital units with Everi in a $6.2 billion deal announced in February. That should clear up the IGT investment thesis, putting more focus on the company’s highly profitable lottery segment.

For IGT, our proprietary lottery sales tracker shows still muted ‘core’ sales, though content phasing & a potential Mega Millions price adjustment should bolster growth beginning in 2H24,” wrote Stantial.

The analyst rates IGT a “buy” though he noted second-quarter sales of lottery tickets and scratchers likely trended lower.

“We believe soft core lottery trends mostly reflects well-discussed jackpot fatigue, though ongoing softness in low income consumer spend and implications from persistent inflation & higher gas prices bear watching,” said the analyst. “Based on our analysis of weekly Powerball & Mega Millions sales data, we estimate sales of multi-state jackpot games were inline year-over-year.”

Attractive Valuations Available Among Gaming Tech Stocks

Shares of slot machine manufacturers are mixed this year, but there are some standouts. For example, Light & Wonder is up 28.71% since the start of 2024.

That company — one of the largest in the space — is reducing debt and signaling to investors that it sees value in its shares with a $1 billion buyback plan announced last month. Stantial notes that across the slot supplier landscape, valuations are at historically depressed levels.

“Forward 1-year enterprise value/earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiples are -37% to -17% below long-term averages ex-LNNW, on Street estimates that seemingly embed stable casino gross gaming revenue (GGR) and North American slot replacement cycle,” according to the analyst.

Stantial observed that it’s possible slot supplier stocks could benefit from lower interest rates, but added stock selection in the group will be paramount going forward.

Gaming Tech M&A Outlook Subdued

There have been signs of elevated consolidation activity in the gaming technology industry this year, namely in the form of the aforementioned IGT/Everi merger and Brightstar Capital Partners $1.1 billion offer for PlayAGS, which has been opposed by some investors. Last week, Evolution AB announced it’s buying Las Vegas-based Galaxy Gaming for $85 million.

In aggregate, those deals highlight appetite among buyers for gaming tech firms, but a more competitive headwinds for smaller suppliers and depressed valuations on small-cap consumer cyclical stocks could keep a lid on large-scale mergers and acquisitions activity over the near-term.

“While we don’t envision further large-scale M&A for our direct supplier coverage, we believe elevated M&A activity should help provide a floor for valuations while changes in ownership/execution on integration will need to be closely monitored for market share opportunity/risk,” concluded Stantial.