Aristocrat Leisure (ASX:ALL) is one of ASX’s largest tech stocks that just happens to be in gaming

Why has Aristocrat Leisure (ASX:ALL) succeeded where so many other gambling stocks have struggled? This company is up nearly 55% in the last 12 months and 96% in the last 5 years. Many other gaming stocks have struggled due to cost of living pressures, new restrictions and (in the case of some stocks) pecuniary penalties. Not so with this company.

Who is Aristocrat Leisure?

Aristocrat Leisure has historically been a manufacturer of gambling slot machines, known as pokies in Australia. It was founded by Len Ainsworth, who still owns shares today – and yes, he is involved with Ainsworth Game Technology.

Over the years, Aristocrat Leisure has broadened its product range – now offering computerized card game simulations, electronic table games, and linked jackpot systems (such as the patented Hyperlink systems). The company has developed the Reel Power system, where players buy reels instead of lines, winning combinations in the standard configuration.

Gone international through M&A

Since its listing in 1996, Aristocrat Leisure has made several acquisitions including Video Gaming Technologies for $1.3bn in 2014, mobile game developer Plarium for $500m in 2017 followed by Big Fish Games for US$990m in the same year. A US$3.7bn bid to purchase Playtech last year was ultimately turned down by shareholders, although it had no opposition to its US$1.8bn bid for NeoGames. The latter will give it a presence in the so-called ‘real money games’ sector where punters bet for hard currency, as opposed to tokens as they do in the social gaming centre.,

All of this has made Aristocrat Leisure a truly international company, with over 80% of revenues from North America, explaining why it has done well at a time many ASX gambling stocks are struggling under the threat of regulations.

In FY23, the 12 months to September 30 2023, the company made $6.3bn in revenue (up 13%) and a $1.45bn post-tax profit (up 53%). It has been led by Trevor Croker who has been at the helm since 2017 and served in lower management roles with the company prior to that.

The opportunity and risks

As an ASX 20 company in dozens of jurisdictions and with over 70% of its revenue recurring, Aristocrat Leisure may appear a good investment. It boasts a combined TAM of ~$350bn across its different segments. It has a proven track record of growth, showing you can trust it more than you could trust a company without such a track record.

There are a few risks with this one. One is the potential for an economic downturn, something that caused revenues to dip during the GFC, but only slightly. The COVID pandemic called a 26% retreat in revenues, only to rebound to pre-COVID levels in the next year. Despite high inflation, 2022 was a record year for US commercial casino gaming revenue, with the total revenue across the US estimated to be over US $1bn.

Some bigger risks include inflation in respect to costs of game development and geopolitical issues. You see, Russia and Ukraine were both major centres for gaming development and the war between them forced development to move elsewhere. One country was Israel, but even there is not stable right now.

Decent growth ahead

Ultimately, consensus estimates expect good growth in the years ahead. For FY24 (which will be confirmed in a matter of days when audited results are released), $6.7bn in revenue is forecast and $7.1bn in FY25 – both representing 6% growth. Although a 5% decline in profit is expected for FY24, it is still anticipated to be $1.39bn. And growth is expected to return in FY25 with a $1.5bn profit forecast, representing 10% growth.

The mean target price is $59.88 per share, a slight discount to the current share price. And although Aristocrat Leisure is capped at $39bn, this represents just 23.5x P/E, a figure reasonable in our book, although its PEG is over 2x. Dividend investors may not like this company given the <2% yield, nor will ESG investors due to the fact that it is in the gambling industry. Growth investors, however, shouldn’t find themselves disappointed if the company is able to deliver what it promised.

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