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Why Aristocrat could become one of the fastest growing ASX blue chips

Aristocrat Leisure Limited (ASX: ALL) is a global gaming provider and game publisher, and the largest Australian gaming company with a current market capitalisation of $18.9 billion. Its land-based operations such as pokies and slot machines can be found in more than 90 countries, while its recently expanded Digital segment attracts an aggregated 8 million daily active users (DAU). The Aristocrat Leisure group earns 60% of revenues from the United States (US), and reports in US dollars.

Teaching an old dog new tricks

After listing on the ASX in 1996, Aristocrat Leisure initially found its success in the manufacturing of gambling machines. Amid fears of tightening regulation and the ethical scrutiny placed on gambling in recent years, it decided to diversify its operations into the lucrative mobile gaming industry.

In 2017, it acquired the Israeli based studio Plarium, shortly followed by the Seattle-based gaming company Big Fish Games. These short years have seen unprecedented growth in the digital gaming segment, which now contributes to 39% of total group revenue. With many works in the pipeline, and collaborations with huge brands such as Disney, Aristocrat Leisure is well on its way to becoming a powerhouse in the US$32 billion mobile gaming industry.

Recent performance

Driven by these strategic investments, the group achieved an extraordinary result for the 6 months ended 31 March 2019. Total revenues grew by a staggering 35% to US$2.1 billion, with net profit after tax (NPAT) up 34.9% on the prior corresponding period. Despite an expectedly slower demand for gambling products in the Australia and New Zealand region, its profits were more than compensated by a record 17% growth in earnings from North America.

The importance of the company’s international earnings are further emphasised when its reported operating revenue growth of 29.8% is compared to a constant currency growth of 20.8% – highlighting the role of currency diversification. Even so, both of these figures are dwarfed by the staggering 37% revenue growth in its Digital segment, thanks to the full year contribution from its Plarium and Big Fish Games acquisitions.

Foolish takeaway

In my opinion, the company’s timely acquisitions and diversification have allowed the gaming giant to remain relevant in a rapidly changing industry. Although the company’s valuation appears stretched at a price-to-earnings ratio of 34, the company’s sound strategy and relentless investment into gaming technology could fuel its success for years to come.

So far in 2019, the Aristocrat Leisure share price is up 40%.

For some more ASX stalwarts worth a closer look, don't miss our top blue-chip shares for 2019.

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Motley Fool contributor Saran Likitkunawong has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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