About Light & Wonder
Perspective and frame of mind are key in this life.
For instance, when I initially think of light and wonder, my mind drifts off into a happier place, particularly one filled with a blue glazed Vail, Colorado sky with a ground filled with perfectly crystalized flurries from the heavens, a chill that brushes upon my face and kisses my cheeks until they form a shade of childlike, flushed red, followed by a newfound sense of wonder, enveloping my mind, soul and spirit while being sent off with a far away yet distinct golden-esque light that is guiding me towards a new wonderful adventure.
But that’s just me.
In the case of the company, Light & Wonder, it’s just kind of sad, from our vantage point.
Namely, this is a company that is headquartered in Las Vegas, Nevada (this isn’t the sad part, by the way) and it is in the business of manufacturing and selling specialty, “fun-filled” colorful, digital games through a few different mediums, including primarily games within the confines of a casino (hey, it’s Vegas, what did you expect?) as well as mobile games that users can enjoy while they’re not in Vegas.
The reason we view some of this as being sad is the simple, bleak image of an adult tucked away at a casino and letting the house do what it always tends to do; win.
Especially when it comes to digital games that can easily be rigged to issue the least amount of wins while also somehow enticing its users to give it just one more shot at their hand of gaining a fortune, it is quite depressing to think that people are in so much over their heads that they think they have a better chance of winning than losing.
I guess this can be somewhat attributed to the business brilliance of Light & Wonder and also attributed to the addiction of gambling that all too many find themselves mired in.
Regardless, this is something to consider on the more human side of things (among many other relevant factors, of course) prior to making any sort of investment in this company through its stock (NASDAQ: LNW).
Onto some of the more general business aspects related to Light & Wonder, this company makes money in a fashion similar to that of Roblox in that it sells virtual tokens that its players must purchase in order to play their hand at the particular game in question.
The company also engages in the sale of the equipment that many of these games run on to the casinos and/or property owners the games are played in, which in this case is mostly casinos, many of which are concentrated in where else but Las Vegas, Nevada.
Now that some of the foundation has been laid with respect to this company, its operations and how it makes money, let’s dive a bit deeper into Light & Wonder’s core financials so as to determine whether or not this company’s stock (NASDAQ: LNW) is worth thinking about as a long-term investment prospect.
Light & Wonder’s stock financials
In getting this thing started, it can be initially seen that the company has a prevailing market capitalization of $6.41 billion, a share price of $70.35, a price-to-earnings (P/E) ratio that is not currently listed (at least on TD Ameritrade’s platform) as well as no annually distributed dividend offered to its shareholders.
Putting some of this initial information together, perhaps Light & Wonder is investing copious amounts of its earnings and profits back into the business, specifically in the technology spectrum of its operations, which would make sense given the fact that most (if not all) of its games are digital and properly functioning technology combined with continuous innovation(s) are at the heart of this company and what it does.
This being said, no complaints so far.
Getting a little more familiar through the company’s balance sheet, Light & Wonder’s executives are tasked with taking care of and tending to just north of $6 billion in terms of total assets as well as around $5 billion in terms of total liabilities.
While it would in some instances, it really doesn’t surprise us all that much that the company’s total assets and total liabilities are nearly identical in amount given the previously mentioned truth of the matter which is that Light & Wonder is tasked with continuously innovating and reinvesting (through that, tacking on some debt in financing said innovation) in its business segments and intellectual and technological properties.
Therefore, we are not yet all too concerned with the company’s balance sheet breakdown (in terms of a general total assets and total liabilities perspective) however we do hope to find that this company’s executives are prudent in managing its outstanding liabilities and debt(s) so as to ensure they don’t become untamed and prove to be a nightmare for the company, forcing it to restructure (Chapter 11 bankruptcy) or even worse, liquidate (Chapter 7 bankruptcy).
At the end of the day, however, maintaining more total assets than total liabilities tends to always be a positive.
Regarding this company’s recent year-over-year (YOY) revenues, specifically starting in 2018, Light & Wonder’s total annual revenues have been trending slightly downwards for the most part, starting off on a high note in 2018 at almost $3.4 billion and dipping down to around $2.4 billion the following year, $1.7 billion in 2020 (which can be attributed to the negative pressures exerted by the public onset of COVID-19), $2.1 billion in 2021 to its latest reported figure (displayed on TD Ameritrade’s platform) of $2.5 billion in 2022.
Obviously, COVID-19 was going to hurt this business as it hurt the casino and resorts businesses and with that, took down its internal operations (including, of course, its casino floor operations) with it.
Nevertheless, we are still fairly concerned by the fact that the company’s revenue hasn’t risen back up to its previous 2018 levels, back into the $3 billion area code.
Sure, COVID-19 initially stunned the company, however, fears and widespread concerns might be mounting under the surface as it relates to whether or not gamers (in the context of Vegas, that is) are really still into the company’s products, as it seems as though it is possible that less casino operators are ordering Light & Wonder’s machines and gaming content.
All things considered, it’s always slightly concerning when a company’s revenue doesn’t climb back up to or exceeds that of its pre-COVID levels following the initial onset and impact of the Virus, as consumers might’ve changed during that time or other virtual casino gaming hardware companies are actively nipping away at the company’s market share, putting a dent in its top-line.
If we’re being completely transparent, playing some digital game in the context of being in a casino and/or resort sounds like one of the absolute least fun things to do, but that could just be us.
No offense, Light & Wonder.
At any rate, moving over to the state of the company’s cash flow statement, Light & Wonder experienced some recent cash burn years, particularly between 2018 and 2020, however, it did manage to turn a corner right into positive net income territory, which was encouraging to see, especially following what has so far been the brunt of COVID-19.
Additionally, some comfort can be taken in the fact that the company’s total cash from operations (also as displayed on the company’s cash flow statement) have been positive for the most part, experiencing a recent negative year of -$381 million, as reported in 2022, perhaps due to the company investing more in its digital arena, or maybe it is a more ominous reason in that it has some of its cash tied up in inventory or its costs are generally rising, for one reason or another.
Nevertheless, this has been a one-off sort of occurrence for the company in recent history but it is still something we think investors should keep their eyes on in the quarters and years to come.
Light & Wonder’s stock fundamentals
As it pertains to this company’s profit margin, specifically its trailing twelve month (TTM) net profit margin and how profitable this company as it compares to the relative average(s) of its peers, according to TD Ameritrade’s platform, Light & Wonder has some work to do on this front, as its TTM net profit margin is listed at -3.14% to the industry’s respective average of 8.72%, which is somewhat concerning, to us, at least, given this company’s leadership position in the world of digital casino gaming.
It could just be the case that its competitors are much smaller in scale and thus are a bit more nimble in their operations and as a result are able to outperform Light & Wonder on this front, however, this company isn’t enormous by any means and we expect industry and sector leaders to have their leadership position displayed through a few different metrics, certainly including its TTM net profit margin.
This just sadly isn’t the case with Light & Wonder at the moment.
Additionally, the company’s TTM returns on both assets and investments are essentially just as disappointing as its aforementioned TTM net profit margin, as they are both slightly negative relative to the industry’s positive returns, probably due to the same reason above regarding the company’s scale, as it can take longer for larger companies to achieve a higher (or at least more competitive) TTM return on these spectrums due to all of the moving parts involved with running the operation it does, and with that, the time it takes to extract returns out of its various investments and assets.
Should you buy Light & Wonder stock?
We aren’t the biggest fans of this company’s core business model for a different reasons, not limited to the fact that it is inventory-heavy and if at any point it can’t sell through some of its machines, these assets will quickly become de facto liabilities and tie up this company’s capital, not to mention that this company is at the mercy of gaming audience that is notably sensitive to recessions or any other type of economic downturn(s) and if the economy does happen to take a turn for the worst (which we think is a real possibility in this point in time), they might not be able to take their grocery or rent money and spend it in Vegas, just to waste it, which is typically what ends up happening.
While this company’s balance sheet is in fine condition overall, its total annual revenues have slumped a good deal and its TTM net profit margin is considerably lower than that of the industry’s average, along with its far from impressive TTM returns on assets and investments.
In considering all of the facts, it seems to be most appropriate to give this company’s stock (NASDAQ: LNW) a “sell” rating at the moment.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.