How Resilient Is Aristocrat Leisure In Downturn?

Australia | Sep 20 2022

This story features ARISTOCRAT LEISURE LIMITED. For more info SHARE ANALYSIS: ALL

Aristocrat Leisure's eyes remain on the i-Gaming prize, as the company continues its pursuit of growth in the US market despite an economic downturn.

-Aristocrat Leisure continues to target significant market share in the US i-Gaming industry
-While the market remains positive, analysts point to a weakening consumer outlook as a risk to company growth
-Land based gaming strength provides platform from which to leverage digital market share gains

By Danielle Austin

The market continues to be drawn to Aristocrat Leisure’s ((ALL)) US i-Gaming opportunity as the company targets significant market share, but will a weakened consumer environment drag on the company’s outlook?

Gaming content company Aristocrat Leisure provides gaming and entertainment options in both the on-site gaming space, including casino systems and pokie machines, and through its digital platforms.

While historical data suggest gambling spend remains largely resilient during economic cycles, analysts have pointed to Aristocrat Leisure’s digital platform as not only offering a competitive advantage, but providing a low-cost entertainment substitute that could support peer outperformance in an economic downturn.

While Aristocrat Leisure’s recent unsuccessful bid for Playtech has shaken the market and reshaped expectations, the company continues to execute on its five-year “buy and build” strategy to penetrate the US i-Gaming industry. Analysts have estimated the market could be worth US$7.8bn by FY25, likely with upside risk as i-Gaming is legalised in more jurisdictions.

The company’s existing strength in land-based gaming should provide a position of strength for it to build off into i-Gaming content. Aristocrat will likely need to pursue acquisitions to gain market share comparable to competitors of around 25%, but Morgan Stanley sees the company as able to gain a 5-10% share over the coming year.

Having materially de-rated in the last year, analysts have described Aristocrat as being attractively valued for the growth potential on offer. Market leading design and development spend, a shift to recurring earnings from transactional, and expansion into new verticals and diversification of earnings all underpin positive market views on the stock.

Performance in mobile gaming and casino

Despite concerns of the impacts of an economic downturn, casino industry revenue has largely remained resilient, reportedly 32% above pre-covid levels as of June. Aristocrat's land-based games also outperformed peers, with revenue growing 7% year-on-year in the June quarter to the industry’s 6% in the same period.

Within FNArena’s database coverage, both Citi and Morgan Stanley have updated their views and projections for the company in the week past. Both equivalent Buy rated, these brokers have an average target price of $42.60.

Citi expects positive industry trends, and the outperformance of Aristocrat Leisure’s land-based business, to underpin the company’s outlook. Morgan Stanley highlighted its high design and development spend and capacity to act on potential acquisitions as supporting growth.

Citi (Buy, target price $40.20) warns of likely impacts of supply chain issues on earnings margins, already these are being felt by the company’s competitors.

Morgan Stanley (Overweight, target price $45.00) meanwhile, took a more positive view, pointing to the US i-Gaming opportunity for potential upside to an already strong growth outlook. Morgan Stanley expects Aristocrat Leisure’s shift to a recurring earnings model should assist the company in navigating the weaker consumer environment.

Outside of database coverage, a recent update from Goldman Sachs (Buy, target price $43.00) drew attention to the industry-wide decline of mobile gaming revenue, which in August fell -14% globally. The steepest decline was reported in racing, shooter and geolocation games, which fell -32.7%, -32.2% and -29.1% respectively.

Despite this, Goldman Sachs lifted earnings forecasts 2.3% and 0.4% for FY22 and FY23 respectively, marking to market for currency exchange rate changes. This broker acknowledged mobile gaming revenue levels reflect a 4.4% compound annual growth rate compared to pre-covid despite the recent decline, and finds the Social Casino segment to demonstrate ongoing strength, accounting for 50% of Aristocrat Leisure’s booking.

All in all, the seven stockbrokers monitored daily by FNArena generate a consensus price target for the shares of $43.28, suggesting upside potential of 25.9% from yesterday's closing share price.

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