Investors sold off the Light & Wonder Inc. (ASX: LNW) share price on Tuesday, sending the ASX 200 tech stock more than 18% lower to end the day at $134.53.
What happened?
The catalyst for the selling was news that the game developer had been hit by legal action from rival Aristocrat Leisure Limited (ASX: ALL).
Aristocrat alleges that Light & Wonder's Dragon Train game infringes on the copyright and intellectual property of Dragon Link, one of its most popular games.
Unfortunately for the ASX 200 tech stock, Aristocrat successfully argued its case in front of judges. Light & Wonder advised:
Light & Wonder, Inc. today received an order from the US District Court for the District of Nevada granting Aristocrat a preliminary injunction relating to L&W's Dragon Train game.
We respectfully disagree with the judge's decision and will promptly file an appeal. We will continue to vigorously defend against Aristocrat's claims, including presenting our defenses to a jury at a trial.
And while management has reaffirmed its guidance for FY 2025, believing it can mitigate the immediate impact of the injunction, the market wasn't as positive and investors were quick to hit the sell button.
Time to buy this ASX 200 tech stock?
Bell Potter believes that the selling has created a buying opportunity for investors.
In response to the news, the broker has retained its buy rating with a reduced price target of $161.00 (from $186.00). Based on its current share price of $134.53, this implies a potential upside of almost 20% for investors over the next 12 months.
Commenting on the injunction, Bell Potter said:
LNW is moving forward on several key initiatives to mitigate the immediate impact and any continuing business disruption from the injunction.
Possible initiatives include: Development of altered DT game by different LNW studio and replacement of DT software with other games on existing Kascada cabinets. We downgrade EPS by -5%, -10% and -6% over CY24-26 reflecting lost earnings from the injunction.
Nevertheless, the broker remains positive on its outlook and sees value in its shares. It adds:
Whilst the loss of future Dragon Train revenues is disappointing, our Buy thesis remains predicated on LNW's cross-platform strategy and leading scale producing a portfolio of high-performing games in both land-based and digital markets.
As a result, we expect improvement in product quality to strengthen LNW's competitive advantage, supporting higher ROIC.
However, its analysts concede that "any damages paid by LNW present potential downside risk to our forecasts and may create an overhang on the stock in the near term."
