The gambling industry globally has been evolving rapidly in recent years, and Australian poker machine maker Aristocrat Leisure Ltd (ASX: ALL) has evolved along with it.
For those with only a passing knowledge of the company, you might be excused for thinking they were still focused on their previously core business of poker machines.
But in recent years, the company has invested heavily into the digital realm, with its two other key divisions now made up of Product Madness, which publishes free-to-play mobile games, and Aristocrat Interactive, which operates in the real money-gaming area.
This latter area itself is evolving quickly, with areas such as iLottery, or online lottery, growing rapidly in the US.
Technology investment paying off
In their most recent research note on Aristocrat shares, the team at Macquarie have focused on the potential growth of the iLottery sector, where they say Aristocrat is the market leader.
According to the Macquarie analysts, US iLottery operations generated US$9.5 billion in sales in 2024; however, the industry is growing quickly as new geographical regions open up.
Through the next three years to 2027, we see US iLottery volumes exceeding US$13 billion, with 12% average annual growth including 7% underlying and the remainder from recently-opened jurisdictions including North Carolina and Massachusetts.
And, they add, Aristocrat is well-placed with "superior" spend per capita in its licenced jurisdictions, driven by technology and content investments and licence wins.
The Macquarie team is forecasting that Aristocrat's Interactive division will grow to generate US$968 million in FY29, which would translate to a compound annual growth rate of 21% from FY24.
We have high conviction in Aristocrat's ability to deliver 10-15% earnings per share growth annually in the medium term. With strong cashflow and balance sheet optionality for capital management/M&A, and see the 23 times 12-month forward price to earnings ratio as attractive, which is a 10% premium vs ASX 300 industrials.
How much are the shares worth?
All of this translates into an outperform rating on the stock from the Macquarie team, which has a price target on Aristocrat shares of $75, up from $64.16 currently.
Factoring in the modest dividends the company pays, a total shareholder return over 12 months of 18.5% is expected.
Aristocrat in March reported first-half revenues of $3.03 billion and a first-half net profit of $732.6 million, up 5.6% on the previous corresponding period.
Aristocrat is scheduled to release its FY25 results on 12 November.
