Over the last six months, Light & Wonder shares have sunk to $104.34, producing a disappointing 7.4% loss - worse than the S&P 500’s 1.4% drop. This might have investors contemplating their next move.
Is there a buying opportunity in Light & Wonder, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Despite the more favorable entry price, we're cautious about Light & Wonder. 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
A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Light & Wonder’s demand was weak and its revenue declined by 1.3% per year. This was below our standards and signals it’s a lower quality business. 
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 9.1%, a deceleration versus its 12.7% annualized growth for the past two years. This projection doesn't excite us and suggests its products and services will see some demand headwinds.
3. Previous Growth Initiatives Haven’t Impressed
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 7.3%, 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 bar. Following the recent decline, the stock trades at 19.3× forward price-to-earnings (or $104.34 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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