Scientific Games Stock Handed Downgrade After Sizzling Run

Posted on: November 3, 2021, 10:05h. 

Last updated on: November 3, 2021, 12:05h.

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

Following a torrid pace that’s seen the slot machine manufacturer’s shares nearly double this year, Scientific Games (NASDAQ:SGMS) stock is contending with a downgrade today.

Scientific Games stock
Scientific Games’ booth seen at the annual G2E conference in Vegas. Analysts still like the company for the long term, but some think the once-hot stock could be cooling off. (Image: Las Vegas Review-Journal)

In a note to clients, Stifel analyst Jeffrey Stantial lowers his rating on the gaming technology company to “hold” from “buy.” But he lifts his price target on the stock to $90 from $84. That implies upside of more than nine percent from the Nov. 2 close and is well above the consensus price forecast of $81.44. With asset sales now pending, the analyst sees that catalyst as off the table.

We think the asset-sale driven value creation has largely played out, with investor focus now shifting to the long-term thesis where still material execution risk offsets our enthusiasm for this leadership team and their well-illustrated RemainCo growth strategy,” said Stantial.

In June, Las Vegas-based Scientific Games said that as part of its debt-reduction efforts, it would sell its OpenBet sports wagering platform and its SG Lottery unit. Endeavor Group Holdings, Inc. (NYSE:EDR), the parent company of the Ultimate Fighting Championship (UFC), said in late September it’s acquiring OpenBet for $1.2 billion in cash and stock. Last week, Brookfield Business Partners LP (NYSE:BBU) announced it’s purchasing SG Lottery for up to $6.05 billion.

Scientific Games Stock: Sidelines for Now

Over the past six months, Scientific Games is higher by 49.39 percent. But the shares are off nearly 6.6 percent following news of the SG Lottery unit, indicating investors are waiting for the company’s next act.

“As such, despite our positive view on the long-term trajectory of the company, we feel more comfortable on the sidelines for the time being, as we wait for proof points of impact from the new strategy/team to manifest in results,” said Stifel’s Stantial.

For about two years, Scientific Games has been transforming, reconfiguring its executive team while attempting to become a more nimble, digitally focused company with a reduced debt burden. The aforementioned asset sales contribute to those objectives. Shedding businesses that don’t mesh with its digital efforts could help Scientific Games avoid dreaded valuation discounts that previously afflicted gaming technology companies.

“We have argued for years that many, if not all of the highly diversified gaming tech providers have suffered a longstanding conglomerate discount. This view is validated by the robust multiples received for the sports betting and lottery businesses, with a still healthy ~11x multiple currently ascribed to the” new Scientific Games, adds the Stifel analyst.

Next for Scientific Games

Earlier today, Scientific Games said it’s acquiring Authentic Gaming, marking the buyer’s initial foray into the live casino market. That segment accounts for 30 percent of global iGaming revenue. Financial terms of the deal weren’t disclosed. Authentic’s clients include 888 Holdings, Entain, and LeoVegas, among others.

Separately, Scientific Games is attempting to acquire the 19 percent of social casino developer SciPlay Corp. (NASDAQ:SCPL) it doesn’t already own.

The suitor made an offer featuring an 11 percent premium in mid-July, and the target is mulling the bid. But it’s been several months since either side publicly commented on the matter. Bringing SciPlay back in-house is important to Scientific Games’ efforts to bolster its online presence.