Gaming Tech Sector Gears Up for Promising Q2 Earnings with Encouraging M&A Activity
As the second-quarter earnings season progresses, gaming technology companies are preparing to reveal their financial results. Analysts are predicting solid but not spectacular trends. Stifel analyst Jeffrey Stantial has provided insights into the anticipated performances of key players in the sector. Light & Wonder (NASDAQ: LNW) and PlayAGS (NYSE: AGS) are expected to surpass estimates for the June quarter, while International Game Technology (NYSE: IGT) is predicted to meet Wall Street forecasts. Everi (NYSE: EVRI), on the other hand, may fall short of expectations.
IGT is currently merging its global gaming and PlayDigital units with Everi in a $6.2 billion deal announced in February. This merger is expected to clarify IGT’s investment thesis, allowing the company to focus more on its highly profitable lottery segment.
“Our proprietary lottery sales tracker shows still muted ‘core’ sales, though content phasing & a potential Mega Millions price adjustment should bolster growth beginning in 2H24,” wrote Stantial.
The analyst rates IGT a “buy” but noted that second-quarter sales of lottery tickets and scratchers likely trended lower. “We believe soft core lottery trends mostly reflect well-discussed jackpot fatigue, though ongoing softness in low-income consumer spend and implications from persistent inflation & higher gas prices bear watching,” he said. “Based on our analysis of weekly Powerball & Mega Millions sales data, we estimate sales of multi-state jackpot games were in line year-over-year.”
Attractive Valuations in the Gaming Tech Sector
Shares of slot machine manufacturers have shown mixed performances this year, but there are some standouts. Light & Wonder, for example, is up 28.71% since the start of 2024. The company, one of the largest in the space, is reducing debt and has demonstrated confidence in its shares with a $1 billion buyback plan announced last month. Stantial notes that across the slot supplier landscape, valuations are at historically depressed levels.
“Forward 1-year enterprise value/earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiples are -37% to -17% below long-term averages ex-LNW, on Street estimates that seemingly embed stable casino gross gaming revenue (GGR) and North American slot replacement cycle,” according to the analyst.
Stantial observed that slot supplier stocks could benefit from lower interest rates but emphasized the importance of stock selection in the group moving forward.
M&A Activity in the Gaming Tech Sector
There have been signs of elevated consolidation activity in the gaming technology industry this year. Notable deals include the aforementioned IGT/Everi merger and Brightstar Capital Partners’ $1.1 billion offer for PlayAGS, which has faced opposition from some investors. Last week, Evolution AB announced its acquisition of Las Vegas-based Galaxy Gaming for $85 million.
These deals highlight the appetite among buyers for gaming tech firms, but competitive headwinds for smaller suppliers and depressed valuations on small-cap consumer cyclical stocks could limit large-scale mergers and acquisitions activity in the near term.
“While we don’t envision further large-scale M&A for our direct supplier coverage, we believe elevated M&A activity should help provide a floor for valuations while changes in ownership/execution on integration will need to be closely monitored for market share opportunity/risk,” concluded Stantial.
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