Posted on: July 14, 2022, 01:48h.
Last update: July 14, 2022, 2:15 a.m.
Small-cap gaming provider Inspired Entertainment (NASDAQ:INSE) is tracking other gaming tech names to decline this year. But its dramatic declines create a valuation storyline that may be too compelling for some analysts to ignore.
In a note to clients today, B. Riley analyst David Bain reiterated a “buy” rating on the video game terminal (VGT) and software provider. He set it with a price target of $24, implying the stock may more than triple from current levels. Bain’s call comes as shares of Inspired have lost 31.37% over the past month – a drop that makes the name seem cheap compared to its peers.
The analyst notes that investors may be overestimating two of the main headwinds weighing on Inspired – sterling weakness and a forthcoming white paper on updating UK gambling regulations.
Although INSE is exposed to foreign exchange, we believe the resulting impact on earnings before interest, taxes, depreciation and amortization (EBITDA) and net free cash flow is lower than investors’ perception,” writes the analyst. “We calculate that a 10% change in the pound equates to a change of around 4% or less in EBITDA and a change of only 1% to 2% in net free cash flow. 70% of revenue of INSE are generated in pounds. However, well over 70% of its costs are also denominated in pounds (which mitigates the impact on EBITDA).”
As for the aforementioned white paper, the release date is not yet known. But investors are worried about the possibility that regulators will limit maximum bets on slot machines. This is relevant for Inspired, as online slots in the UK represent around 9% of the company’s EBITDA. Bain notes that the average internet slot bet on Inspired games in the UK is near the bottom of the speculated maximum bet.
Another take on Inspired
As a small cap stock, Inspire is not widely followed by analysts. Among those covering the name, there seems to be a consensus that the stocks are deeply undervalued.
Roth Capital analyst Edward Engel is in this camp. He reiterates a “buy” rating on the stock with a price prediction of $12, down from $16 previously. He also says the stock is extremely inexpensive and “catastrophic” scenarios are unlikely to occur.
“INSE is among the cheapest stocks in our coverage, trading at 5.0x 2022E EBITDA and a free cash flow yield of 19%,” notes the analyst. “This comes as retail demand remains healthy/stable and digital segments continue to grow at a healthy pace. While continued economic pressure and overly restrictive UK regulations would lead to downward earnings revisions, INSE stocks appear to be predicting too dire an outcome.
Inspired is seen as a play on the digital gambling boom, as well as the potential growth of the North American online lottery market, which some analysts believe could eventually exceed $11 billion in value.
Valuation alone is not a reason to buy or sell a stock. But there’s more to Inspired’s story than its status as a value game.
For example, the company recently launched online gaming content offerings in Ontario, Canada, and is planning a near-term launch in Pennsylvania, one of the top iGamng states in the United States.
“We believe INSE is in substantive discussions with several U.S. lotteries for iLottery content delivery contracts. We do not model these and expect iLottery to be a significant upside driver for the estimates. of CY23E / CY24E EBITDA”, concludes Bain.