The share price of Aristocrat Leisure Limited (ASX: ALL) is outperforming the market on Tuesday after UBS pointed out that the market has yet to catch on to the growth of the gaming machine company's social casino revenue.
The stock jumped 4.1% to a one-month high of $29.04 – making the stock the fifth-best performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index.
Its outperformance is only bested by investment firm Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), agri-business Elders Ltd (ASX: ELD), gold miner Saracen Mineral Holdings Limited (ASX: SAR) and heavy machinery company Emeco Holdings Limited (ASX: EHL).
While Aristocrat has gained 29% over the past year, its shares have slumped 12% before today's rally since August.
Next month's full-year profit announcement by Aristocrat Leisure is likely to surprise on the upside as UBS is tipping a circa 25% revenue growth in the group's social gambling business, which is made up of mobile apps.
The broker reached this conclusion after tracking the top 50 casino gaming apps in the iOS app store for the US, Australia and UK markets.
"The results suggest a continuation of growth into the September quarter with 2H18 growth of ~38% for Product Madness and ~5% for Big Fish social casinos (c.25% for the group)," said UBS.
"On a quarterly basis, the September quarter (+21%) showed slower growth than the June quarter (+33%) which was expected and reflects a cycling effect of the release of Cashman Casino and Jackpot Magic in the [September 2017] quarter."
The broker believes there's room for more growth in FY19, particularly from its Lightning Link slots app, which was released in Australia during May and hit peak revenue share of 9% last month. Over the same period, the app only accounted for 1% market share in the US thanks to Aristocrat's international marketing efforts.
Social gambling is growing around 17% a year and UBS believes that Aristocrat will deliver superior growth rates as its ramps up promotion of Lighting Link.
The broker increased its earnings per share (EPS) forecast on the group by 2% for FY19 and 3% the year after. This means Aristocrat is expected to deliver EPS growth of around 30% in the current financial year, which is on top of the 35% EPS growth that UBS is forecasting for FY18.
What's more, the strengthening US dollar will provide a further tailwind to the group given its large US exposure.
UBS has a "buy" recommendation on the stock with a price target of $37 a share.
