The Aristocrat Leisure Limited (ASX: ALL) share price is edging lower on Thursday.
At the time of writing, the ASX 200 gaming technology company's shares are down 1% to $37.45.
Should you buy the dip with this ASX 200 share?
One leading broker that is likely to see today's weakness as a buying opportunity is Goldman Sachs. In fact, this morning, the broker released a very bullish broker note relating to Aristocrat.
According to the note, the broker has added the ASX 200 share to its coveted conviction list with a buy rating and $45.70 price target.
Based on the current Aristocrat share price, this implies potential upside of 22% for investors over the next 12 months.
Goldman also expects a modest 2% dividend yield, which bumps up the total potential return to 24%.
Why is Aristocrat on Goldman's conviction list?
Goldman notes that there are concerns about how to "factor in game decay and new game pipeline for Pixel United." However, the broker isn't concerned and explains why:
For Pixel United, we believe that there is less concern on the outlook for Social casino games vs. games like RAID where decline in game revenue is more likely. We update our outlook for RAID to factor in a natural game decline based on similar Squad RPG games, although recent in-game activations offer further upside to this view. Excluding these, it is notable that earnings from New Game pipeline only contributes to c. 11% return on the cumulative D&D spend for new game development.
Another key reason for its positive view on this ASX 200 share is its valuation. The broker believes that the market is underestimating the potential of its new Anaxi (iGaming) business and sees scope for a major rerating in the near future. It explained:
If we remove our valuation for Anaxi of A$2.3bn in EV (adjusted for D&D), ALL's current market cap implies 15.7x P/E for rest of ALL's portfolio which translates to 1.8x PEG, compared to historical averages of 21.3x and 2x respectively, both at unwarranted discounts in our view. We believe that ALL could re-rate strongly as the market gains more confidence on 1/ the outlook for the mobile gaming business and 2/ the potential for growth in Anaxi. At current valuation levels, the market only factors in Anaxi as more of a free-optionality that comes along with the more established gaming businesses in our view.
