Light & Wonder received a Hold rating from Deutsche Bank, which considers 2025 a key year for the long-outlined $1.4 billion adjusted EBITDA target.
Light & Wonder stock has been trading in the mid-$80s and Deutsche Bank’s price target is $78.
“We think a clear key to the story will be whether this target can be achieved, despite the fact that the consensus forecast of $1.36 billion sits roughly 2% below the $1.4 billion guidance, which management has repeatedly reaffirmed,” said analyst Carlo Santarelli said. “In short, we believe it is unlikely, as evidenced by our forecast of $1.32 billion. While LNW surely has a lot of oars in the water, the growth trajectories in both the SciPlay and igaming segments are unlikely to make a material dent in the $160 million adjusted EBITDA increase required to hit the 2025 target.”
Achieving the target will be “highly reliant” on the gaming segment, which will be largely predicated on share gains and growth in adjacent markets. In the bigger picture within the gaming segment, Santarelli said there are headwinds to material growth for Light & Wonder.
One is any expansion in operator spending budgets. Second is the loss of Golden Train, a key driver of yield expansion via the mix of premium titles. Third is any limit on domestic industry slot gaming revenue growth in 2025. Fourth is any market share losses in the Australia for-sale segment given the loss of Dragon Train.
The game maker reported a slightly narrower $64 million profit for the third quarter of 2024. The results didn’t greatly reflect the removal of Dragon Train enjoined by the U.S. District Court in September over intellectual property issues.
“While it is possible Dragon Train 2.0 can offset some of these headwinds, we don’t put a high probability on it serving as a like-for-like replacement,” Santarelli said. “To tie it up, LNW based on third-quarter call commentary regarding 2024 adjusted EBITDA growth implied a year-over-year growth rate of adjusted EBITDA in the low- to mid-single-digit-range for the fourth quarter.”
“To achieve the 2025 target, Light & Wonder would need adjusted EBITDA to accelerate to a range of 12% to 14% in 2025 versus 10% to 12% growth in 2024, with a fourth-quarter exit rate of low to mid-single digits. We see this target as unlikely and believe this path will be a key focus for investors in 2025.”
While the near-term setup has seemingly baked in the headlines from the Dragon Train litigation, the process is not yet resolved. At this stage, Santarelli expects “things to remain quiet on this front until a settlement occurs.” In addition to the Dragon Train situation, a less-heralded though present risk relates to the Michigan whistle-blower, a former employee claiming he was asked to falsify reporting and subsequently dismissed after refusing to do so. The case is currently with the Michigan Eastern District Court.
While net cash from operating activities less cap expenditures relative to adjusted EBITDA has slipped in the year-to-date on a year-over-year basis (22.4% versus 29.5%), Light & Wonder’s balance sheet and cash flow position remain “distinct strengths and a competitive advantage.”
“Looking ahead with net leverage sub 3.0x at present, we see LNW as well positioned to continue to return capital to shareholders in the absence of strategic M&A opportunities,” Santarelli said. “When thinking about the current free-cash-flow yield, which approximates 6%, the bridge to the 2025 adjusted EBITDA target and the balance sheet health, we have to imagine M&A plays a role in 2025. (That is) given returns that could certainly outpace the share buybacks while also perhaps providing some alternative narrative to the $1.4 billion adjusted EBITDA target discussions.”
