Light And Wonder (ASX:LNW): With PointsBet out of the picture, is this the best way to play the US sports betting market in 2024?

Light And Wonder (ASX:LNW) is now the best way to gain exposure to the US sports betting market on the ASX. Can it succeed where PointsBet failed? It certainly has a better chance, but is no certainty to succeed in a highly competitive market. Nonetheless, its 50%+ gain since its May 2023 ‘listing’ on the ASX shows investors are confident.

Introduction to Light & Wonder (ASX:LNW)

We used a picture of Las Vegas for this article for a good reason, because the company (fittingly) is based there. Light and Wonder claims it to be a leader in ‘cross-platform games and entertainment’, but it is a specialist in gambling applications. It is essentially a maker and distributor of poker machines and gambling games. It makes money in several ways – in Australia from monies the pub or casino that owns the machines pay it a kind of ‘rent’, but in the US it makes money from a lease fee to a casino or via a profit-share agreement.

This company has had a long history which traces back over a century, but it only got into lottery systems in the 1970s. It became Scientific Games Corporation in 2001 after acquiring a company by that name which made instant lottery equipment. By 2020, it had a diverse business in the gambling industry.

A Dual-listed sports betting play

However, it also had $9.2bn in debt and was forced to sell its lottery and sports betting business to focus on casino gaming. It adopted the name Light and Wonder in March last year.

It has been listed on the Nasdaq for several years, but only listed on the ASX at the end of May last year. The company opted to list Down Under due to interest from Australian fund managers that could only invest in Australian-listed shares. It retains a NASDAQ listing, however, but has performed well since its ASX listing – notwithstanding its stagnation for the last 6 months or so.

Light and Wonder (ASX:LNW) share price chart, log scale (Source: TradingView)

The opportunity PointsBet couldn’t crack

From June 2019 to June 2023, PointsBet (ASX:PBH) appeared to be the best bet for ASX investors to gain exposure to the US betting market.

You see, sports betting over there is way behind Australia with the practice only legalised in 2018, with America’s Supreme Court striking down a law preventing individual states (except Nevada) legalising sports betting. Five years on, only 33 states and the District of Columbia had legalised sports betting.

But the roll out was slower than investors anticipated and the company struggled to make money. It couldn’t enter all the states it wanted to because some states only allowed in-person betting and it had to pay licensing fees to states, not to mention significant marketing costs. By May 2023, PointsBet was only in 15 US states.

And so PointsBet bit the dust and cashed out on its US business. So the question is, can Light & Wonder succeed? It is difficult to give a yes or no answer, but we would note it is better equipped, being a larger and more established company.

The risks facing the company include macroeconomic risks, that enthusiasm for new games wanes off and regulatory risks. Not all types of games it offers are legal everywhere – for instance, its igaming (online casinos) are only legal in 7 US states and outlawed in Australia. The opportunity is that if this is liberalised, LNW has a big opportunity ahead of it.

There is also intense competition with is tough to begin with, but a recent preliminary injunction by Aristocrat Leisure (ASX:ALL) bought a roll out of one of its games to a halt. LNW has shrugged off the impact in media interviews by claiming it has dozens of games, although this game was among the more popular.

Light and Wonder’s progress

LNW closed CY23 with US$2.9bn in revenue, a figure up 16% from the year before. It’s strongest division was gaming machines, with 31% growth, but SciPlay is the segment that is consistently breaking quarterly records. The momentum at the top line has continued into CY24, with revenues from the September quarter increasing 15% to US$537m, although its net income (profit) was US$64m and this was a 25% decline.

Analysts covering LNW’s ASX shares have a mean target price of US$179.47, up 26%, whilst analysts covering NASDAQ shares have a target price of US$110.11, up 19% from the current price. For CY24, analysts expect US$3.2bn in revenue (up 10%) and a more than doubling of its EPS to US$4.34, from $1.75 the year before. Looking to CY25, they call for $3.42bn in revenue (up 7%) and 5.95 EPS (up 37%).

If the company can achieve this growth, we imagine the stagnation in the share price will be a thing of the past before too long.

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