Gambling operators, especially the smaller ones, need the support of software and hardware providers that enable them to function. In this segment are businesses in a wide range of national markets, and a variety of end markets or verticals, with little to tie them all together.
Playtech
Playtech (PTEC) is the leading UK-listed supplier of gaming software and systems. It's an interesting proposition as it operates (in almost equal parts) as both a gaming operator and provider of third-party software and gaming content. Playtech is a gaming operator primarily through its 70 per cent stake in the Snaitech business in Italy (Europe’s largest gambling market), where it runs sport and horseracing betting, poker, skill games, casino games, betting on virtual events, bingo and lotteries. It also owns two racecourses.
Snaitech is a very profitable business, accounting for 60 per cent of earnings, but is more volatile than the other part of the group, which provides business-to-business (B2B) solutions, and may offer slower long-term growth now that the post-Covid rebound has run its course.
Playtech has weighed up selling Snaitech and diverting resources into expanding its software and platform arms – this could create a lot of value for shareholders but appears (for now) to be on hold. The Italian business looks to be materially undervalued within the group overall despite potential local regulatory headwinds (it appears to be carried at just four times Ebitda within a sum-of-the-parts) which is why selling it off could unlock value.
Playtech has frequently been an M&A target, and this has contributed to a volatile long-term share price as potential offers have come and all have gone away: in 2022 Formula One’s Eddie Jordan’s gaming enterprise, JKO, considered a bid before giving way to Australia’s Aristocrat Group, which offered a rejected 710p. Hong Kong private equity house TTB stepped up after that bid failed, and Gopher Investments and another unnamed Hong Kong private equity house were both believed to be ready to pay 1,000p back in 2021. All fell away for different reasons, but given the low rating – the price/earnings (PE) ratio is just 11 – and the company's decent growth it is hard to believe that potential buyers are not still sizing up this stock.
This is a stock with lots of growth and value creation channels: market-leading B2B products that are taking share globally, including a drive into the Americas (North and South) through its tie-up with Mexico’s Caliente and other large operators. Previously risky and/or problematic operations in financial markets and in Asia are either gone or are de-emphasised, and the founder and one-time lead shareholder, Teddy Sagi – not always popular with investors – is no longer involved here.
Playtech’s valuation feels low and looks to be carrying too much historic bad blood over bids it failed to back, memories of unpopular ventures it undertook, the decision not to resume a once-generous dividend, and concern that it may never realise the proper value of its Italian operations, which would allow it to reignite its growth engines through fresh M&A. This is not anywhere near as risky a business as the rating suggests, and a fairer valuation on fundamentals would probably be closer to 800p rather than today’s sub-600p level and a fresh bid could see more than that achieved.
Light and Wonder
Light and Wonder (US:LNW) is a major US business ($6bn valuation) that can trace its history back over 100 years to involvement in totaliser systems used in pari-mutuel (shared pool betting rather than fixed odds) at US racetracks under the name Autotote. Today, the group provides gaming services and products for online casinos, alongside physical slot machines (Ballys and WMS brands, amongst many others), app/web gaming content and platforms (SciPlay) and gaming content for third-party platforms (including market leader FanDuel).
LNW has struggled in the recent past with excessive debt and has had to sell off a number of businesses, including sports betting, which is currently the most dynamic part of the US gaming market. A major player but perhaps too much tied to the less dynamic in-person market, which only offers growth of 3-5 per cent, but there is a strong recovery element here from more recent reading woes. The share price is drifting sideways after a recent 50 per cent surge, but with debt now under control and more management energy focused on growth, this recovery play – earnings per share (EPS) is forecast to quadruple between 2023 and 2025 – may be worth another look on any share price weakness and the now fulsome PE ratio could very rapidly fall away.
Genius Sports
Genius Sports (US:GENI) is a UK-based but US-listed provider of sports data for third parties to use on their sports betting platforms. It came to market in 2021 via a special purpose acquisition company with exceptional growth expectations – Ebitda is forecast to grow 10-fold between 2022 and 2025 – driven by the legalisation of online sports betting in the US. However, as both a high-growth and software business it was hit hard by the 2022 market shakeout, and after doubling in the first year, the share price fell 80 per cent, bottoming out at just one-quarter of its IPO price point. While unlikely to be profitable until at least 2025, growth potential is very high and it looks attractive on the ‘Rule of 40’ basis (see ‘US gambling stocks worth owning’, IC, 16 June 2023). While this stock is likely to remain below its $10 IPO level for a while yet, investors could see more than a 25 per cent pick-up from the current price of just under $6.
International Game Technology
International Game Technology (US:IGT) is another UK-based but US-listed business providing gaming, software and networking for third-parties operating in the gambling market, and another business badly beaten up in the 2022 tech shakeout. Its core business is in national and state lotteries, so its underlying markets are less dynamic than sports betting, but are very stable – although this is only likely to deliver growth at around 5 per cent. The rating is pretty low (year two PE of 15), but the best of the value may have gone after the price nearly doubled over the past nine months. However, this should be a solid performer in the longer term, and with a 2.5 per cent yield it could be possible to see a total shareholder return (TSR) of 5-7 per cent here.
Evolution AB
Evolution AB (SE:EVO) is a leading operator of the increasingly popular live casino play market. Live dealer gaming feeds (typically streaming to web and app platforms) is seen as premium play and is growing in popularity globally. As this is typically outside the skillset of most operators, and still only a small part of total gaming play, operators are still to buy in this gaming format. This is driving annual forecast growth of almost 20 per cent between 2022 and 2025. Despite this, analysts are a little cagey as this side of the industry could be both a fad and vulnerable to development of in-house alternatives by the sector’s larger players. Only a microcap (£21mn equivalent market cap), but a good potential takeover target.
Aristocrat
Australian third-party provider of online and machine gaming content Aristocrat (AU:ALL) looks to be able to offer low double-digit EPS growth, but investors can pick up this stock on a PE well below 20. This could allow investors to see decent ‘drag-along returns’ – this is where the rating remains unchanged but earnings growth should push the share price along. TSR on this basis could be more than 10 per cent a year on a three-year view. The shares may be up 25 per cent in the year to date (YTD), but they did look oversold at the start of 2023, then on a PE in the low teens.
Sportradar
US firm Sportradar (US:SRAD) is another B2B platform and content provider that IPO’d with a sky-high valuation in 2021 only to be dragged under by the market’s rotation away from tech and growth. It is still fast-growing – with a compound annual growth rate (CAGR) of 27 per cent – but unlike many of its immediate peers, it is already profitable. It is further different in that its software is designed to catch cheats, and this potentially makes it more interesting than being just another gaming content provider. However, its bias could see it clash with more generic and AI-based cyber security systems. The shares still feel quite pricey, on a PE of 50, but growth is forecast to be greater than 25 per cent CAGR and could bring useful diversity to any gaming stock portfolio.
