Amongst the wider market sell-off, the Aristocrat Leisure Limited (ASX: ALL) share price has fallen 33% in the past 4 months and dropped from an all-time high of $33.06 in July 2018 to a 52-week low of $20.92 on Thursday before closing at $21.
Why has the Aristocrat share price been falling?
Aristocrat is a gaming company with a long history of success. Through a number of acquisitions Aristocrat has grown from a predominantly physical poker machine business, into a diversified gaming business. The company now has exposure to the manufacture and distribution of pokies, online games, and mobile games. These games generally fall into two categories/markets: social or casino based.
Aristocrat estimates the global size of the two markets to be: US$4.5 billion for the casino market; and US$45.9 billion for the social gaming market. Over the next three years, the gaming market is expected to grow by 13% per annum, to around US$73 billion.
Some of the aforementioned digital gaming acquisitions have the potential to strongly contribute to earnings growth. Two of these are the acquisition of social games developer Plarium and casino platform Big Fish in 2017. This is because of the capital-light business model of the online and mobile gaming industry. As the company shifts towards digital, there should be a boost to margins over time. The large addressable market also provides great opportunities when compared to the more saturated pokie market.
Aristocrat is a large player in casino games, but a smaller player in the much bigger social games market. The company will need to invest heavily and execute well in order to take advantage of the potential in social games. Revenue growth in casino games has slowed in recent months, affecting the share price and expectations for the stock. The slowdown appears to have been felt across the industry, with Aristocrat maintaining market share.
The near-term investment in social gaming will put pressure on margins. Combined with the slowdown in revenue growth, Aristocrat currently trades at 22x earnings. This is above the market average of 16/17x earnings but is modest for a company with so much growth potential. Insiders agree that the share price seems low, with some recent stock purchases.
Aristocrat grew revenue by 48% to $3.6 billion and profit by 25% to $616 million in the last financial year.
Foolish Takeaway
Aristocrat has a lot of potential, but the share price has come under pressure as a result of some fair questions about the company's immediate future. I think the Aristocrat Leisure share price should do well over the long run, but there may be more pain in the short term.
