Light & Wonder ‘Dragon Train’ Decline Overdone, Stock Cheap, Says Analyst

Light & Wonder ‘Dragon Train’ Decline Overdone, Stock Cheap, Says Analyst

Following a court decision concerning its "Dragon Train" line of slot machines, Light & Wonder's (NASDAQ: LNW) stock fell sharply last week. However, one analyst contends the company is cheap and that the loss was excessive and premature.

David Bain, an analyst at B. Riley, began covering the gaming gadget manufacturer with a "buy" rating and a price target of $120 in a recent report sent to clients. That suggests a possible gain of almost 25% from Tuesday's closing price. According to Bain, the stock is significantly undervalued in comparison to its peer group and historical standards.

"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 US District Court for the District of Nevada awarded Aristocrat Gaming a preliminary injunction last week, claiming that Light & Wonder's "Dragon Train" slots were based on trade secrets used in the Australian company's "Dragon Link" games. This caused the stock to plummet.

Too Strict of a "Dragon Train" Punishment for Light & Wonder

Despite its popularity, "Dragon Train" machines were only supposed to make up $70 million, or less than 5%, of Light & Wonder's projected $1.4 billion 2025 EBITA, a prediction the firm stuck to following the aforementioned court decision.

That's a little proportion, and it may support Bain's claim that the stock received an excessively harsh punishment last week. He pointed out that the business has reaffirmed its projections for 2025 and is still dedicated to giving investors their money back.

“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.”

Late last week, CEO Matt Wilson stated in a video on Light & Wonder's investor relations website that the firm is trying to remove the "Dragon Train" slots from North America and swap them out for its other games, many of which are well-liked by gamblers.

SciPlay Sparks Light and Wonder Stocks

Long-term, SciPlay, the social casino developer that Light & Wonder reconnected with last year after a 2019 spin-off, might be an undervalued driver of the parent company's shares.

Bain said that the Light & Wonder division compares well to competitors and that SciPlay is expanding when the larger social casino market reaches a plateau.

“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).”