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

Shares of Light & Wonder (NASDAQ: LNW) tumbled last week following a legal ruling pertaining to its “Dragon Train” series of slot machines, but one analyst argues the decline was too much, too soon, and that the stock is undervalued.

In a new report to clients, B. Riley analyst David Bain initiated coverage of the gaming device manufacturer with a “buy” rating and a $120 price target. That implies potential upside of about 25% from Tuesday’s close. Bain views the stock as deeply discounted relative to historical norms and its peer group.

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 slumped last week after the US District Court for the District of Nevada granted a preliminary injunction to Aristocrat Gaming, which asserted Light & Wonder’s “Dragon Train” slots were based on trade secrets behind the Australian company’s “Dragon Link” games.

Light & Wonder ‘Dragon Train’ Punishment Too Harsh

Though popular, “Dragon Train” machines were expected to account for less than 5%, or $70 million, of Light & Wonder’s expected 2025 EBITA of $1.4 billion — a forecast the company stood by in the wake of the aforementioned court ruling.

“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 posted to Light & Wonder’s investor relations website late last week, CEO Matt Wilson said the company is working to pull “Dragon Train” slots in North America and replace those devices with its other titles, many of which are popular with bettors.

SciPlay Catalyst for Light & Wonder Shares

SciPlay, the social casino developer with which Light & Wonder reunited last year following a 2019 spin-off, may be an underappreciated catalyst for the parent company’s stock over the long term.

Bain pointed out that SciPlay is growing as the broader social casino industry plateaus, adding that the Light & Wonder unit compares favorably to rivals.

“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).”