Over the past six months, Light & Wonder’s shares (currently trading at $91.49) have posted a disappointing 13.6% loss, well below the S&P 500’s 9.3% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Light & Wonder, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why there are better opportunities than LNW and a stock we'd rather own.
Why Is Light & Wonder Not Exciting?
With names as crazy as Ultimate Fire Link Power 4 for its products, Light & Wonder (NASDAQ:LNW) is a gaming company supplying the casino industry with slot machines, table games, and digital games.
1. Revenue Spiraling Downwards
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Light & Wonder’s demand was weak over the last five years as its sales fell at a 1.6% annual rate. This was below our standards and is a sign of lacking business quality. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Light & Wonder’s revenue to rise by 6.5%, a deceleration versus its 14.5% annualized growth for the past two years. This projection is underwhelming and implies its products and services will see some demand headwinds.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Light & Wonder historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.2%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
Final Judgment
Light & Wonder isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 18.1× forward price-to-earnings (or $91.49 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of Light & Wonder
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