$LNW：估值倍数仅为 Aristocrat 一半的老虎机寡头｜Zack Buckley

Hello and welcome to yet another value podcast. I'm your host Andrew Walker. Today we've got a great one for you. It's my friend Zack Buckley on you know, this is why I'm not a professional podcaster. I don't know if he's on for the third, fourth, or maybe it's the fifth time and he's qualifying for the exclusive yet another value podcast shirt, but Zack is on to talk about Lightening the Wonder. The ticker there is LNW. It trades in Australia, not the US, so there's extra risk there. See the full disclaimer at the end of the podcast or in the show notes, wherever you want, but it is a really interesting one. Uh is it's kind of got something for everyone, right? Do you want a cheap business? Boom, check. Eight seven or eight times EBITDA and there's not a lot of CapEx here. It's quite uh free cash flow heavy. Do you want share buybacks? Boom, check. Do you want catalysts? Do you want a good business and oligopoly structure? Check, check, check. And Zack's thought a lot about this and especially towards the middle you can hear it. I I you can just feel the conviction and he's got confidence and clarity of his thinking. I think it's going to come through. Oh, by the way, do you want a discount to its uh best peer who trades for like basically double the valuation? Check. Uh so we've got all that. We're going to get there in one second, but first a word from our sponsors. >> Today's podcast is sponsored by AlphaSense. Here's something I've been thinking more and more about recently. Most AI tools are very good at sounding right. The summary is clean, but can you actually trace it back to the filing, the transcript, the specific passage that drove the answer? Or are you just trusting the confidence of the output? For investors, that's not a minor concern. My biggest worry is that I'm going to ask AI something and it's going to tell me something and I'm going to build investment thesis on it and then I'm going to find out, you know, six months later when I get smashed in the face that my whole investment thesis was wrong because the AI said something that wasn't true, that I didn't verify, that I trusted and did not verify, and that I can't source. And it sounds minor now, but you know, you work with AI all day, it's easy for one thing to slip through and it's scary. So, what's the solution? Well, AlphaSense is the AI platform built specifically for this. They own the content. Over 500 million curated documents from broker research and expert transcripts to filings and earnings calls and they own the retrieval layer on top of it. That means every answer links back to an exact verifiable source because the answer is only as good as what's underneath it and with Alpha Sense, you know exactly what that is. See it for yourself. Try a free trial at alphadashsense.com/yavp. That's alphadashsense.com/yavp or see a link in the show notes. All right, hello and welcome to yet another value podcast. I'm your host Andrew Walker.

With me today, I'm happy to have on for, I think, the fourth time—Zach? I'm not sure—but my friend Zach Buckley. Zach, how's it going?

Hey, good. Thanks so much for having me on. Good to see you again.

Super excited for today's topic. It's a super interesting one. Before we get there, a disclaimer to remind everyone: nothing on this podcast is investing advice. There are disclaimers at the bottom of the show notes and at the end of this podcast.

That's always true, but we're going to be talking about a stock that is domiciled in Nevada. It used to be U.S.-listed, but now it's fully Australian-listed, so there may be some extra tax and other considerations that everybody should keep in mind. Do your own research and all that sort of stuff.

The company we want to talk about is Light & Wonder. The ticker there is LNW. It trades in Australia. There are lots of corporate backgrounds to talk about and lots of stuff to talk about going forward, but I'll toss it over to you. What is Light & Wonder, and why are they so interesting?

Yeah, so Light & Wonder is focused on slot machines, but they're a conglomerate. They're basically in an oligopoly with IGT and Aristocrat. They've been around a long time, and those 3 control the vast majority of the market.

I think the background is super important here. Aristocrat historically was sort of the darling in the industry. They had a very successful, I'd say, 2010 to 2020 time frame. The stock was a multibagger over that time frame.

What's interesting is that Light & Wonder, I think, had the wrong strategy for a period of time. They were overleveraged and weren't investing in game development. Aristocrat was able to really take share during that time frame.

A lot of the management team from Aristocrat ended up going to Light & Wonder. Originally, I was following Light & Wonder, but the 2 things that were holding me back were, first, the management team. I didn't think they had the right strategy, and they were ultimately losing market share to Aristocrat. Secondly, the business was too levered.

Those 2 things changed, and that's when we got involved, sort of after those 2 things changed. Jamie Odell, the former CEO of Aristocrat, came over to Light & Wonder. Tony, who was also the former CFO at Aristocrat, came over to Light & Wonder. Then Matt Wilson, the current CEO, was brought over as well.

You basically had the former CEO and former CFO come over. You had the strategic person in Jamie, the finance person in Tony, and then sort of the person to go out and execute in Matt. I think you really had a powerful team. They brought over about 50 executives from Aristocrat in total, so you just had this mass migration of talent from Aristocrat to Light & Wonder.

You went from, again, sort of the wrong strategy to the right strategy. They also sold their lottery business and used that to delever. That was a huge part of me getting interested as well. Historically, I just thought it was more levered than I was comfortable investing in.

Then they got the leverage down to roughly 3 times net debt to EBITDA, which is a level I think is very comfortable, especially for a business that has 70% plus recurring revenue. Combine that with it being under 10 times earnings today, and I think it's super attractive. Maybe I'll just pause there.

No, that's perfect. Maybe we could also talk through the most recent 12 to 18 months, because, not to spoil the story, but they relisted solely in Australia, and I think we'll be talking about that. They also have a big settlement in the past 6 months.

If anybody pulls up the Australian stock price, it starts at 150 at the beginning of the year, pops to 180 right in mid-January, and it's kind of come back down to 110. Maybe if we start talking about that, it would help set the frame for the stock as it sits today.

Yeah, absolutely. Our history with it, maybe just going back a little bit farther: We initially invested in September 2022. We bought it around just in the low 40s, and this is all in U.S. dollars, and ended up selling it about 2 years later, sort of in the 80 to 100 range. So we had a really successful investment.

We continued to follow it. Then, on the announcement of the sole listing in Australia, the stock sold off pretty dramatically. If you think about it, there were a ton of funds that just couldn't own it. So it sold off from, again, I'm talking in USD, about 100 USD to the low 70s, and so we made it a meaningful position again.

That was temporary because you had forced selling on the U.S. exchange with really no buying from Australia, and then that flipped. The stock very quickly rallied from kind of the low 70s USD to about 120 USD, which would again be closer to 180 Australian dollars.

That was sort of after the litigation was settled in mid-January. Obviously, it's retraced a lot of those gains. It's come sort of all the way back down to the high 70s USD, which is around 110 Australian dollars.

I think it's super interesting here. What really has driven that, primarily, is a mismatch in the timing of game launches. Aristocrat launched a bunch of new games in the first half of this year. Light & Wonder is launching a bunch of games in the second half of this year.

Market share in short-term numbers can really fluctuate fairly significantly with game launches. Since you had a lot of game launches from Aristocrat in the first half without so much of a competing offering from Light & Wonder, and then in the back half of this year you have the opposite, we really think it's a back-half-loaded guidance story. We think that's appropriately so.

No, that's perfect. I do kick myself, because you mentioned they were listed in the U.S. and then went to Australia. I remember a lot of people around me, in the event-driven world, saying, “Hey, this is the perfect setup, because there are a ton of U.S.-listed funds that just can't buy. They have to sell because it's going to Australia. Once it goes to Australia, there's a ton of Australian pension money that's going to be forced in.”

So you have this forced-sell-into-forced-buy setup, and it worked out so perfectly. Hindsight is 20/20, but I'm thinking, “That seems like something that would have been up my alley. Why wasn't I just all over this?”

Okay, so the business: You've got this oligopoly—IGT, Aristocrat, and Light & Wonder. These are selling to people who are familiar with casinos. You can think, “Hey, you're walking the casino floor. You see—I believe Aristocrat has, if you see the Monopoly slot machine, right?” That's Aristocrat, right? So they make the slot machine.

And if I remember correctly, they’re getting a percentage of revenue every time somebody’s pulling on one of these boxes, right? A lot of them are lease models. So, I’ll pause there if you want to explain.

Yeah, I would say the majority is a lease model. That’s part of what makes it so attractive: this is a highly recurring-revenue business. Today, Light & Wonder is over 70% recurring revenue.

A lot of that is driven by the gaming operations section, which is again this lease model. It’s a very attractive model and gives a high degree of predictability and consistency across the business over time.

So, it is an oligopoly, but they’re dealing with big players, right? I know there’s a long tail of small casino players and stuff, but if you’re in the U.S., and a lot of the business is in North America, you’re dealing with Caesars, Boyd, MGM in one group, where I’m probably forgetting someone off the top of my head. So, it’s an oligopoly on both sides.

How are they competing? These are great businesses with recurring revenue. You get a slot machine in there, and it’s going to last—the payoff of that lasts for a long time. How are they competing, and why isn’t this a race to Caesars saying, “Hey, Light & Wonder, bring your pricing down by another 1%, or else we’re going to go with the Monopoly machine over there”? Why are they getting such great economics, if that makes sense?

I think that while there are only a few players out there, those players are developing by far the best games over time, right? If you think about it, would you want to be negotiating with Grand Theft Auto? There are games that people are just going to play significantly more than others.

If you have Grand Theft Auto versus a no-name first-person-shooter game, there’s just no competition, right? Grand Theft Auto has brand recognition, people who have been playing it for years, customer loyalty, and it’s obviously an extremely well-developed game.

It’s not a perfect analogy, but I compare it somewhat to video-game development. Light & Wonder has the right team in place to develop the best games and continually bring out the best games over time.

Obviously, casino space is valuable, and people are trying to maximize revenue per square foot, just like in retail. Having the best games out on the floor is what’s going to maximize revenue per square foot.

There’s plenty of negotiating and trying to get the best deal. Obviously, there are big players on both sides, but ultimately, there’s no need for a race to the bottom because there’s enough for both sides to be really happy.

Yeah, no, that’s kind of the beautiful thing. I’ve had a lot of people tell me—this type of business appeals to people all across the investing spectrum, right?

If you want financial engineering, which is more where my mind tends to go, this is such a beautiful model: you install the box, you get a percentage of revenue. It’s not completely recession-resistant, but these are much more recession-resistant than you think. Go look at what regional gaming did in the GFC and everything. It was much better than I think people would expect.

You get a cut, inflation goes up, and your cut gets even bigger. The machines are installed, and you’re not going to rip out the box and replace them. It’s great. You’re negotiating against, “If you don’t go with our box, sure, you can get something cheaper, but would you rather pay us 2% more of revenue, or would you rather have a box that generates 20% more revenue?”

It’s beautiful there. It’s beautiful on the moat-business, compounder side. It has all sorts of things that are attractive to a bunch of different investors.

Yeah, I totally agree. I think you want a great business, which this clearly is: high recurring revenue, a high degree of predictability, a high moat, a very long growth profile, and a very high degree of being able to predict years out. Those are all really valuable in terms of the business, and you have a first-class management team.

Clearly, they’ve done this before, and they’ve done it extremely well in the past. In fact, they did it better than anyone else in the industry. I think those are really attractive qualities.

Then you need a great price, right? That’s usually harder to find in these situations. Historically, Aristocrat has been trading for around 14 times EBITDA and in the ballpark of 20 to 25 times free cash flow. Light & Wonder is trading more in the 7 to 8 times EBITDA range, and right now it’s trading somewhere in the ballpark of 8 to 9 times my estimate of free cash flow. So, it’s really attractive.

Let’s go there, because this is a company where, again, I said it’s a financial-engineering model. They’ve published 2028 targets. We can debate where they land, but it’s a pretty narrow band. This year’s estimates and the 2028 targets are well below the sell-side estimates, but it’s not hugely off.

We talked about a great business and huge cash flow. They’re saying they’re going to start buying back shares. They’re trading for a big discount to Aristocrat. I guess I’ll lump all of that together and ask you: What is the market missing, or what is the market’s concern?

There are only 3 of these companies, right? It’s not like restaurants, where there are 100 of them and you say, “Wendy’s trades at a 7-times discount to Chipotle.” You’re like, “Yeah, that’s kind of apples to oranges.” Here, there’s Aristocrat, Light & Wonder, and IGT. Every sell-side analyst has to have these comps, so why is there such a huge discrepancy?

I think the main thing to compare is Light & Wonder and Aristocrat, so I’m going to set aside IGT. I think they should clearly trade very close to parity over time. I think the management team at Light & Wonder intends to—and really believes—I think Jamie really thinks they should trade at the same multiple over time.

I think he’s right. These businesses are extremely similar. Right now, Aristocrat has this halo effect because it’s been listed in Australia for a long time. There are a lot of investors who have done extremely well, so it gets the benefit of having been there for a long time and having rewarded investors.

In Australia, some investors have to choose between owning either Aristocrat or Light & Wonder. In some cases, they’re choosing for now to own Aristocrat because they’ve seen the consistency of the execution over 10-plus years, while Light & Wonder is just a newer story.

I look at it much differently. I think Light & Wonder is growing significantly faster than Aristocrat, so if anything, in my opinion, it should probably trade at least at parity, if not at a premium, to where Aristocrat is. Growth is important; growth drives valuations across multiple different industries.

The fact that Light & Wonder is growing faster makes it shocking to me that it’s trading at such a huge discount. Again, that’s what I think the opportunity is: you have Light & Wonder down very significantly year to date, while Aristocrat is up slightly year to date.

On a multiyear basis, I think Light & Wonder is going to outperform Aristocrat from a growth standpoint. Ultimately, my thesis in a nutshell is that Light & Wonder catches up to being at parity with Aristocrat.

To put round numbers on it, we think they could do $13 to $14 in free cash flow per share by 2028. Again, this is in U.S. dollars. That’s based on taking their $2 billion EBITDA target. I think they’ll achieve that, and then, using what I think are reasonable assumptions for CapEx, interest expense, and taxes, we get to somewhere in the ballpark of $1 billion of net income in 2028.

Depending on the share count and how many shares they buy back, that gets you to roughly a $13 to $15 per-share range.

And if it trades at Aristocrat’s multiple, we’re talking about somewhere in the ballpark of a $280 stock, again in U.S. dollars. Maybe if it trades at 15 times—which I still think is undervalued, but is more reasonable than where it is today—we’re talking more in the $210 range.

Either way, we’re talking about several hundred percent upside and a very high IRR from here. It’s just a question of whether this trades at 15 or 20 times, and I’m not sure. But I’m going to be happy either way.

Look, it’s hard to disagree. The company certainly agrees. I was reading the Q1 call, and they started off by saying, “We’re an omnichannel business with a strong structural moat, a content R&D group engine that continues to compound, an increasingly recurring revenue base, and a durable long-term growth engine.”

You look at that and the numbers, and you’re like, “Hey, you’re getting it for 7 times EBITDA.” But let me try to ask you a few different questions. If I look at Light & Wonder, they had the big pop when they settled the Dragon Train litigation.

We can talk about that in a second, but if I just ignore that big pop in January, Light & Wonder was at 150 last September and is at 110 today. Aristocrat was around 75 or 80 last September, is around 65 today, and bottomed out at 45 in March. They look a lot like SAS charts, right? September is when the AI fears are picking up, and March is where the AI fears are going crazy, and then everybody rebounds a little bit.

I think Light & Wonder probably hasn't had the rebound Aristocrat has, but they look a lot like SAS charts. Light & Wonder ended their Q1 earnings call with a slide that says, "AI is both offense and defense for us," and they ended by talking about AI. I'd love to ask you about AI overall for Light & Wonder. I'll get into the risk in a second, but I'd love to ask you how you think about AI as it relates to Light & Wonder.

Sure. Yeah, look, I think they can get significantly higher productivity per employee from AI, especially around game development. I think there's a potential for them to either take costs out of the business or just get higher productivity. Either way, I think it can lead to higher margins. I think they'll lean toward higher productivity, and so I think that can potentially lead to higher margins for them over time.

I think the only place where it's truly a risk is probably SciPlay. SciPlay is closer to being a commodity. There are fewer barriers to entry there. I think there's a huge moat in terms of casino relationships. It's not like a random venture-capital-funded competitor could suddenly start selling slot machines to Caesars and some of these bigger groups. Whereas in SciPlay, that is a little bit more realistic.

Now, SciPlay has had its own issues that are sort of independent of AI, and so I don't actually think the recent downtrend in SciPlay is really driven by AI. I think it's driven more by sweepstakes. But I guess my point is that I think Light & Wonder will most likely be a beneficiary of AI. I think the fact that they've traded with SaaS companies is completely unwarranted.

And just for those who don't know, SciPlay is their social-games business. If I'm remembering correctly, it's basically free slot machines on your phone, right? It's free slot play on your phone. It sounds silly, but these things are incredibly addictive to people. There were Bloomberg articles about them. There are people spending thousands of dollars on these free-play social machines.

You can correct me if I'm wrong, but that's the business. You're basically saying that, similar to any app store, the barriers to entry come down. There's no security or regulation around selling to Caesars and taking up physical space. So you probably just have an influx of competitors. Am I thinking about that correctly on the SciPlay side?

Yeah. Again, I don't think that's a risk, or that that's what's happening today, but I do think it's a risk in the future. I think that's the main risk that AI poses.

But look, SciPlay is roughly 20% of EBITDA for the overall business. We're talking about something that could be a small headwind over time. The point is that SciPlay doesn't materially change the valuation. SciPlay is certainly not going away. It just may grow less or potentially decline slightly.

It's not like the value of SciPlay is completely impaired. Maybe there's a small incremental value difference, but nothing worth justifying the sell-off in both Aristocrat and Light & Wonder. The fear, I think, was vastly overdone in both.

The only other AI risk I could see is that you're putting these boxes in, and the way you're selling them and getting a percentage of revenue is that you're going to Caesars, MGM, or obviously global casinos and saying, "If you put our box in with Monopoly—or, for these guys, they've got a Roman-themed one; I can't remember the names of the big games—but if you put this in because of the brand name and because they're better engineered, you're going to increase your revenue by 20%."

I guess the risk—and this might just be me dreaming up risk in my head—is that Caesars says, "We're paying these guys a lot of effing money. They have a revenue share on the most profitable thing in our casino: the slot machines. What if we hired 10 really smart scientists, built our own boxes, and had AI run the whole thing? AI could analyze them in real time."

I don't think that works for several reasons, but I just proposed that risk to you. That is disastrous, right? It makes more sense to me that Caesars, which is focused on gaming, could build its own slot-machine SaaS with a dedicated team and have its own brands and everything, than it does to have Walmart come in and say, "We're going to design our own payroll system and our own CRM." What would stop that risk from coming into play?

I think it's important to think about the talent in the industry. There are talented developers who are hard to get, and almost all of them are working for either Aristocrat or Light & Wonder. One of the reasons why no one is really competing with them is that they have almost all of the most talented individuals.

When you worry about competition, it's not like someone could just compete with them tomorrow. Someone would have to steal their team—steal Aristocrat's team, for example. They would have to poach one of the teams or groups of employees from either Light & Wonder or Aristocrat, and then it would take them 2 years to develop those games.

It's not like you just poach a team and have a game tomorrow. You poach a team and then spend years developing games. That's just the way the industry and game development work. Caesars, or whoever it would be, would have to poach a team, invest in that team for years, and then hope that the team was able to put out great games over time.

It's a really challenging endeavor for an organization that isn't built around developing games and doesn't already have teams iteratively working on game development constantly. I think that's what makes it so difficult for someone to replicate.

Yeah, no, that makes sense. The other thing I was thinking—and again, maybe I'm too domestically focused and not thinking internationally—is that I don't know if state regulators would love it if the Nevada state regulators, for example, had Caesars come to them and say, "We built our own team, we created our own thing, and we're going to put our own boxes into our casino based on this." It's kind of unproven. I think state regulators might not love that.

Also, if I were Caesars, I might be looking at it and saying, "The world is kind of a crazy place." You read about all these stories of people figuring out the craziest hacks into any new game that comes out and ripping casinos off. I'm sure the casinos could monitor it closely, but do they really want to roll it out across the platform, invest in it, build their own boxes, and risk saying, "the monetization is five for simple or what we were getting with like what we know at Light & Wonder"? Or there could be some flaw in it and we could be paying out 108% of what we're taking in or something.

Casinos are literally given a license to print money. I'm a little suspect that they would take that risk over a multiyear process. Maybe I'm wrong, because they are paying Light & Wonder and these guys a lot of money, but that doesn't seem like the type of risk you and I could take, not the house, if that makes sense.

Yeah, I think there are a bunch of reasons why it's not done. I would just say that Marriott doesn't build elevators, and Delta doesn't build airplanes. It would be the same thing as Caesars trying to build slot machines. It's a very specialized business. You need the math experts, artists, software engineers, sound designers, hardware engineers, and regulatory-compliance experts you were mentioning.

The economics also don't make sense. You're splitting the economics across a wide variety of properties when you're Light & Wonder or Aristocrat, whereas it's significantly smaller when you're any individual operator. You'd also lose access to the best games in the industry. You'd lose access to Aristocrat's Buffalo, which is one of the most popular games, and Light & Wonder's Huff N' More Puff, which is one of the most popular games.

If you put all of those things together, it would honestly be a disaster for the casino if you really think about it, because there are conflicts of interest. They're really just focusing on what they're best at and outsourcing something like slot-machine development and manufacturing to the people who are best at it.

I think it can be underrated.

I’m assuming—I could be wrong—I’m assuming you’re not a slot machine player. I’m not a slot machine player. I’m assuming most of the listeners here are not slot machine players because most of the listeners, not to judge, are very investing-math-oriented. If you’re very investing-math-oriented, it’s hard to say, “Hey, every time I put a dollar into this machine, I know it’s worth 98 cents. Every time I pull…” That’s very hard for people to do.

But if you talk to the slot machine players, they’re very specific, right? I look at them like Monopoly versus Dragon Quest or whatever. Who cares? But they’re very specific. They want their Monopoly game. Some of them want to go to the exact same slot machine that they’re always playing on and stuff.

If you’re Caesars and you say, "Hey, I'm going to take you mentioned Huff and Puff. I'm going to take Huff and Puff out and I'm going to roll out my own thing. My own thing, I think it you know, it's better economics." and then your best players come in and want to sit at their Huff and Puff machine, it’s easy to overlook that in a spreadsheet. But that’s how you lose a lot of customers. I could see a lot of turmoil even if we designed the perfect game, just because we’re going in and telling people, “You don't have my Huff and Puff. You don't have my Monopoly. I’m out.”

If it’s Vegas, they’re going to the casino across the street. If it’s a regional casino, they’re not making that drive anymore.

Yeah, totally. I don’t play slot machines, to answer your question. My grandma actually did, so I did grow up with my grandma going and playing slot machines. I always heard about it, and by the time I was 18, I was thinking, “Why would I do this?” It’s like putting a dollar in and receiving less than a dollar out, obviously on average.

I’ve never been into it myself, but I certainly understand the appeal to people around the world. Again, I think it’s just when you put everything together, imagine Caesars started developing games tomorrow. It would take them 2 years, they would lose all the slot machines that they have right now, and most of their customers would go elsewhere.

Then, 2 years from now, they’d have this huge risk: did they develop something that’s actually useful or not? It would still be very expensive for them because they’d be developing it and spreading it across a lower number of properties. In totality, it’s a huge risk that I don’t think any of their major customers would ever really undertake.

On the slot machines, it’s funny because my mom and grandma’s favorite thing to do is go together and play slot machines for as long as they can. It was my mom’s birthday, and that’s what they did.

I’ve never had a slot machine itch, but I know I’ve been to Vegas once. People are like, “I’m not saying I’m here because I want to go to the craps table every day,” but once or twice a year, you put me at a craps table with $100 or $200, that’s really fun. It’s the exact same thing as a slot machine. It’s funny how different things appeal to people, because the math is kind of the same.

Move to Australia. Go ahead.

On that note for a second, I played poker professionally, so that’s the only gambling I’ve ever done. I made a living for about—I guess, in between college and starting my fund, that’s how I paid rent.

That is skilled, right?

Correct. That’s the only gambling I’ve ever done. It’s one of the few games where you can actually win consistently every time.

There is chance on any given hand, but there’s skill there. Whereas at the craps table, as much as I like to imagine that if I throw it up really high, I’m going to be able to call my landing, I think the odds suggest that’s not exactly what’s happening.

Let’s talk about the move to Australia. These guys moved to Australia—I can’t remember exactly when. Aristocrat obviously moved to Australia a few years earlier. I was reading, I think, the shareholder meeting materials, and they were talking about their move to Australia and how it had been successful. They said, “Look, we’re still incorporated in Delaware. We’ve got this really unique structure that allows us to be in Australia.” They said, “We think Australian investors are sophisticated. They know the gaming industry, and they’re familiar with it.”

It does jump out at me. I thought it was interesting. We talked about the forced selling. I think it’s interesting just on its own, because how many times do you see a company with a liquid U.S. stock market listing saying, “Hey, we want to get rid of this and go to Australia”? By the way, this is a company where the majority of the revenues are domestic, and they’re still incorporated in Nevada.

Why did they choose to do this? Let’s talk about that a little bit.

I mean, first of all, Australia is a heavily gaming-focused market, and I think that should certainly be mentioned in their thinking about it. But I really think it comes down to Aristocrat being listed there and getting a premium multiple.

I think Aristocrat has traded at a significant premium to them for a long period of time. For a while, it was justified. I think they feel—and I certainly agree with them—that it’s not justified anymore. I really think they were trying to converge that gap. They wanted to take advantage of the analysts who have been covering Aristocrat for a long time.

Obviously, there are plenty of fund managers and investors in Australia who have been following and investing in Aristocrat. I really think they were just trying to help that gap converge. Obviously, that hasn’t happened in the short term, but I still think the jury’s out.

I really believe they’ll execute in the back half of this year. I think they’ll execute relative to their 2028 plan. We have to judge them over a little bit longer of a period to know whether or not that was the right decision.

Let’s quickly—earlier, I mentioned that they popped in mid-January of this year. They popped because they settled the Dragon Train litigation with Aristocrat. I think they paid Aristocrat $125 million or $130 million, and they’re still realizing legacy litigation expenses from that.

What was the Dragon Train litigation? What happened there?

You had a ton of employees come over from Aristocrat to Light & Wonder. One employee in particular unfortunately came over and brought information that had been downloaded at Aristocrat, and it seems like it should not have been brought over to Light & Wonder.

I think that was unknown to the management team at Light & Wonder. One of their main games was developed with some of that material. Unfortunately, and understandably, Aristocrat started litigating because of that.

Ultimately, there was a settlement. I don’t think Light & Wonder necessarily admitted wrongdoing, but they did admit that some of the math from Aristocrat was used in that game. It was a small, partial admittance of guilt without a full acknowledgment.

I think it’s great that it’s behind them. Obviously, it’s unfortunate that it happened, and it’s unfortunate that they lost that game. But I think it’s something that’s in the past. In situations like these, it’s something that can very infrequently, but occasionally, happen. I think they handled it well, and we can move forward from it.

If we’re talking right here in late July 2026, the Dragon Train settlement happened in mid-January. I think they pulled the game, and the litigation expenses are largely behind them at this point because the settlement was in January.

If we’re just talking about going forward, where are the economics of this business going? How much is that going to be a drag as you go through the next 12 months, with the game getting pulled? How do they replace it?

Obviously, as you mentioned earlier, they’ve got a lot of wins and new units shipping in the back half of this year. But with Dragon Hunt getting pulled, are there any lingering effects from that?

Yeah, I think it’ll be minimal. Certainly, there was some modest impact from having to pull Dragon Train, but I don’t think it’s something that changes my view. I still think they’re going to hit $2 billion of EBITDA in 2028. I feel like that’s a very reasonable target.

I think the Street is very skeptical of that. You can see where consensus estimates are, and they’re clearly below that. It’s certainly not a guarantee, but where I get confidence is that they set guidance in 2022 for 2025. Keep in mind, Dragon Train hurt them in 2025 as well. It wasn’t like it just hurt them in 2026 and beyond.

They were able to essentially hit the guidance they set in 2022 almost to a T in 2025.

And so, people are extremely skeptical of this team having set a guide again in 2025 for 2028. This is a team that has done this once before, right? They set a guide that was reasonable but conservative enough that they were able to hit it, even though they had some headwinds in that first 3-year period. I would expect it to be the same now. It’s certainly possible they’ll experience some headwinds, and they probably already have to some degree in this period, 2025 through 2028, but I think they’ll be able to hit the guide that they set despite those headwinds. And even if they miss it modestly, I think they’ll still be well ahead of where consensus is.

Why is it? I’m looking right now: their EV is like $11 billion, and you mentioned a $2 billion EBITDA target.

And that’s in USD.

Yeah, yeah. If you’re looking at the AUS line, I think the stock is trading at 110 AUS, and they mentioned in the Q1 call—that’s why I said 14.66 per share in AUS EPS is the minimum they’re talking about for 2028. So, you’re talking about roughly 7x their 2028 EPS. Why is the Street so skeptical of these targets?

I mean, honestly, we’ve been invested since 2022, and the Street has always been skeptical of their targets. If you look at where consensus was for 2025 in 2022, no one believed that they would hit the 2025 guidance. It’s interesting that they still aren’t getting credit even though they’ve been executing for about 4 years now, but they’re continuing not to get credit.

I think what it really comes down to is that people are way too focused on the short term. They had a weak Q1, and they’re likely going to have an okay-to-weak Q2. That’s very understandable in the context of the launch-timing dynamics that had a short-term impact on sales. Obviously, they also have this Dragon Train litigation, which doesn’t show well for them.

But the reality is that this team has executed extremely well over the last 3 or 4 years that they’ve been here. Certainly, when they were at Aristocrat, a very similar team also executed extremely well. This is a team with decades of experience now proving that they know how to execute, and they can execute relative to plan.

I have a high degree of confidence they’ll be able to continue to do that unless there’s some really large, unforeseen thing that comes out. My base case is that they do $2 billion. I’ll be modestly disappointed if they do $1.9 billion. I would be very surprised if consensus ends up being correct, and I think that will just slowly trend up over time. Investors in general are too focused on the very near term and not focused on the long-term picture: this is a great business run by a team that knows how to execute and also knows how to put numbers out that are achievable and hit them.

You mentioned you’ve been following it since 2022. When you talk to people, it just seems weird to me that people would be this skeptical. When you’ve talked to either sell-side analysts or investors, what are they saying about why they’re skeptical, why they’re skeptical of this guidance, and why they’re trading this at a discount to the guidance?

Yeah, I think it really comes down to what I said. It’s just that short-term focus. We just spoke to a sell-side analyst last week about this, and her contention was that things have been weak recently, investors are really focused on what’s happened so far in 2026, and it’s not impressive. I think that’s just the wrong focus personally.

I think she understood that as well. She was just reflecting the investors she speaks to and the mentality out there, which is really that, right now, in the very short term, Aristocrat is outperforming Light & Wonder. Again, that makes perfect sense because it’s like if you were comparing PlayStation and Nintendo, right? If PlayStation just launched a new console and Nintendo hadn’t launched a new console in a year or 2, of course PlayStation sales, from a market-share standpoint, are going to be better.

And vice versa, if Nintendo is going to launch in the second half of this year, obviously they’re going to have a surge in sales off the back of that launch. It would be the wrong way to look at it to say, “Oh, well, Nintendo’s losing its edge because sales are weak in the first half of this year.” This is clearly based on launching new games, and that’s driving sales over time.

It’s really just a patience thing, and I don’t think we’re going to have to wait that long. I bought the shares at $73, again in USD, in November, and I was selling some of that position at $120 literally in January. This business tends not to stay cheap for that long.

I’ve had 2 really successful runs with this, and I think this will be the third. But this time, I know it the best. I’ve been studying it for much longer, and I’ve had a little bit more time to act. I didn’t have that much time, and it was really only cheap for a short period of time in November of last year. This is the largest I’ve ever sized it and the most excited I’ve ever been about it.

I’m doing AI short clips, and I’m going to have to tell the AI that’s such a great clip. I’m going to send it over to you so you can include it, because I can feel the conviction coming off you. I think that will be the advertisement for it. That was awesome.

Let’s go to capital returns, right? Historically, they’ve been a pretty decent share repurchaser, and they’re saying that share repurchases haven’t paused, but they came down a lot in Q1. I think part of that is they’re paying $125 million, but another part of that is they were at 3.5x leverage. You talked about—and I think they’ve said—they peaked at 10x leverage a few years ago. They’re down to 3.5x, and their target is 2.5x to 3.5x. They’re going to buy back a lot of shares starting in Q2. I think they bought back around $100 million in Q2, which has been what they’ve been guiding people to, and they say it’s going to keep going from there. But they’re also saying that they want to get their leverage toward the 2.5x range over the next couple of years.

Let’s talk about all aspects of capital allocation there—the share-buyback story that pays so nicely with this kind of spreadsheet. You’ve got a nice grower, huge cash flows, and spread. I mean, that just breaks the first rule, right? You get kind of infinite returns when you start doing that, versus these guys saying they want to trend their leverage to the low end of their range. It kind of looks to me like, hey, you’re really cheap, you’ve got a history of share repurchases; why not run this at 3.5x leverage and just murder the share count? You’re really cheap. So, let’s talk about all aspects of capital allocation there.

Yeah, so I definitely understand where they’re coming from, and I also understand where you’re coming from. From my perspective, I think share repurchases are a great use of capital, right? Obviously, I think the shares are super cheap, but a lot of people believe that the difference from Aristocrat is that Aristocrat has lower leverage and therefore has higher EBITDA-to-free-cash-flow conversion. One way that you can get closer to Aristocrat on those metrics is by paying down debt.

So, while it may not be the best—if you’re paying down debt at 6% or 7%, that’s not as good as buying a stock that I think offers something like a 30% IRR—better? Sure, I 100% agree with that. But if the multiple goes up—for example, if at my exit in 2028 it goes from 15x earnings to 20x earnings—that 5 turns is a huge difference. Even though you may not get the best per-share value growth, you’re going to get the best exit because you’re getting a much higher exit multiple.

I definitely empathize with their thought process and can understand that they’re really just trying to get to the best stock price over time. I think part of that is playing to the Australian shareholder base, which wants lower leverage and higher free-cash-flow conversion.

That’s exactly what I was going to ask. Maybe I’m too U.S.-focused, but if you’re at 10x leverage, it’s a different story. For the most part, in the U.S., if you said, “Hey, this business has 3 turns of debt, this business has 1 turn of debt, and they’re the same business otherwise, which business is going to trade for a higher EBITDA multiple?” it’s actually the business with 3x debt to EBITDA, because they’re going to get the benefit of the tax shield, basically. Investors kind of like a little bit of that juice there.

But I’ve done a lot in the U.K., and in the U.K., investors puke every time they see leverage. No matter how much you argue with them, once they get the leverage paid down, they always get a better multiple. So, what you’re saying is that it might be a little bit of the remnants of the Australian market, and they’re kind of playing to the investor base they’re looking to attract.

So, that makes sense.

Yeah, and again, I don't necessarily agree with the way the Australian shareholder base is thinking about it, but I can empathize with the management team's goal: to get the highest share price. If the higher share price comes from doing something like paying down debt, I can empathize with how that makes sense.

Let me ask you about the Grover Gaming business that they just bought. I think they bought it for around $750 million. Am I remembering that number correctly?

Yeah.

This is a charitable gaming business that's officially licensed in 5 states and maybe kind of licensed in 10 states, and it's growing like crazy. I don't know a lot about it because the last time I looked at it, I didn't have any notes, but they bought it for around 7.5 times EBITDA. It's growing really quickly, and it's only in a handful of states. They're saying they think it could be deployed nationally.

So, what is it? Why is it growing so quickly, and why were they able to buy it so cheaply?

Yeah, so think of it as different veterans' organizations, like Elks Lodges and American Legions—those types of places. That's typically where they are. A lot of the charitable gaming revenue will go to good causes, right? There will be a way for the states and/or various veterans' associations to benefit, and then obviously Grover is sharing in the pie of the winnings.

So it goes to good causes in the same way the New York State Lottery goes to good causes? Someone's putting a dollar in, and, yes, some of that is going to the schools—I think that's where a lot of the lottery money goes—but a lot of it is going to the company that's running it, and it's maybe not the most efficiently spent tax dollars. Am I thinking about that correctly?

Yeah, it's going to a variety of places, and there are a ton of different beneficiaries, I would say. But yes, in general, it goes to good causes, and then it's split with the operator as well.

Right. This is at charitable locations—you mentioned Elks Lodges—so it tends to be at charitable locations that are part of an organization. They're just normal slot machines, and they're probably exempt from the normal requirements. You don't need a casino license; it's a charitable license, so you can put in a normal slot machine. Is that how it's working?

Very similar. A lot of times, they're called electronic pull tabs, which are slightly different from slot machines, but they have the same basic idea. The only difference is that with a slot machine, the slot machine is determining the outcome, whereas with an electronic pull tab, there's a predetermined outcome. It's kind of like there are 10,000 tickets, and you're going to get one of those 10,000 tickets. A slot machine, on the other hand, has a true random-number generator.

For all intents and purposes, for the audience, they're the same, but there are some nuances between the two. What's attractive about it is that it has high recurring revenue. This is a business with high recurring revenue over time, it's growing rapidly, and there are a lot of growth opportunities for them. I think it fits very nicely into the Light & Wonder portfolio.

It also increases the percentage of recurring revenue. I think paying around 7.5 times EBITDA for a business that is arguably of similar quality to Aristocrat—which trades at around 14 or 15 times—I think that's really attractive. Now, all of Light & Wonder trades at a discount to Aristocrat, not just Grover, but I think this was another very high-quality business to add to the Light & Wonder portfolio.

Again, the majority of their capital allocation is going to go toward paying down debt or share repurchases. They've done very few acquisitions over time, and I think this one was a very sensible one.

No, the reason I ask is because you said “sensible.” I'm just a dumb-dumb who spent half a day looking at it, but you look at their Q1 results and the slides: “This grew units by almost 15% year over year,” and it's in, you know, 3 to 5 states. They've got a map of the U.S.; there's a couple more regulated markets, and it could be allowed throughout the U.S.

You're like, “Man, they've got a 15% grower—ignoring all the new markets that come on—at 7.5 or 8 times EBITDA. This was a fantastic deal.” You start wondering, “How did they get it so cheaply?” They said they were the natural owner, and I think you mentioned that maybe they can repurpose legacy boxes, or maybe there's some duplication of R&D where Grover no longer needs to come up with its own games and can just borrow from the Light & Wonder portfolio.

You start looking at that and think, “Man, this was a hell of an acquisition. How did it go so cheaply?” That's what you're looking at, right?

Yeah, I agree. I definitely think it was a great acquisition for them, and I think it will pay off really well for them over time. I think it already has. It's something we're really excited about for them, and I think it diversifies them nicely.

So, let me wrap up with this question. We talked about it, and I have in my notes, “This is a beautiful business.” It has high recurring revenue. It is related to gambling, which has some cyclicality, but again, as I mentioned, if you look at slot-machine revenue, any individual casino can get crushed because of the guy across the street. But if you look through the global financial crisis, this isn't really down. People consider gambling and slots their hobby.

You've got a high-recurring-revenue business, an oligopoly sales force, a really cheap trading multiple, huge cash flow, good growth trends, and all this sort of stuff. I think you've rebutted a lot of the bear points. What keeps you up at night about buying this business at around 7 to 8 times EBITDA with great free cash flow? What keeps you up at night? What are you worried about? What would break this for you?

I think it would be really hard. Obviously, that's why it's a big position for us, and that's why I think we've had the most conviction we've ever had. If key management-team members left, that would certainly give us pause. We definitely care a lot about management teams. It's really important to have the right people in place, and we think the right people are in place here.

If the stock doubles, right? That doesn't break the thesis, right? That's, say, “Let's go take a ride on the yacht or whatever,” but, yeah.

Yeah. I think the only other thing that would be of concern is big macroeconomic downturns, but a lot of businesses get impacted by that. For me, there's very little company-specific risk that I think would significantly surprise me. The only thing I'm always watching for is management changes.

Aside from that, I don't think there's anything outside of a big macroeconomic shock that would really be able to derail this business. It has the appropriate leverage, it's well diversified, and it has an incredibly entrenched business with its customers. It's extremely valuable to its customers.

AI is not a concern of mine. I don't think AI is a risk to this business, and I think the fact that it's trading with software businesses is an opportunity, not an actual, real risk. We've spent a lot of time looking at businesses this year that have sold off, I think, inappropriately for AI reasons, and this is probably the best example of a company that really has very little, if any, AI risk over time, yet it's trading with a significant AI discount.

What other businesses can you talk about that have sold off inappropriately on AI risk?

We spent a lot of time in the payments sector this year.

Okay. I know one of the ones you're long that has a take-private offer. You don't have to disclose it if you don't want to, but payments are interesting. Okay.

Yeah, and Dave and Sezzle were 2 investments that we spent a lot of time on this year. They ended up both being extremely successful for us. Unfortunately, I don't think either one of them is cheap today. They're both up over 100% off the lows.

I was very excited about both of them at the lows this year, and we made them both meaningful positions. Fortunately—and unfortunately, because they worked—we ended up selling them because we felt like the upside was relatively little at those prices, and the risk was quite a bit more significant.

I think the whole payments sector has been interesting. We've looked at a bunch of different names, and I really spent a lot of time on payments in the last 12 months. I think payments are a great example of an industry that sold off with the SAS apocalypse, which was largely inappropriate.

You know, it's tough because I've spent some time on them.

I mean, look, PayPal's got the offer. I know this isn't directly the payment we're talking about. PayPal's got the offer from Stripe. You look at a company like Shift4, which puts a lot of its cash flow toward buybacks, or PAR Technology, which I know a lot of our friends have looked at historically.

It’s tough because you look at all these things and think, “Hey, they’re really sticky.” But things are moving so fast, and a lot of them are getting hit at the same time across different verticals, whether it’s payments or even SaaS. It’s hard, and the things move fast, right? I think everything bottomed in March and April, and most of the stocks are up 100% since then. You had to pull the trigger pretty quickly on these to get the bottom pricing. I don’t know where I’m going with that, but yeah.

Yeah, look, I think I would just say there are plenty of names that are impacted by AI, and that impact is real. I also think there are plenty of names where people were just shooting first and asking questions later. They didn’t fully understand the impact of AI or what it would be; they were just afraid to own something that might be impacted by AI.

I think Light & Wonder is, again, one of the best examples of a name where that was the first leg down in the stock. When the stock sold off in the February timeframe, I think that’s what started it. Then I think it was just their Q1 results, right? Q1 was soft.

There’s something called Eilers data, which is an industry data source, and the Eilers data has been, I would say, modestly weak in Q2 thus far. I think there’s just too much short-termism in the investor base, and I think that will get rectified very quickly. I think there will be a significant rebound in the stock when that happens.

You know, as you say it and as I think through it, it is one of the best setups, where everybody complains—and maybe because we’re all just jealous—but everybody complains about the pot shop in the short-term mentality. I do think one of the best setups you can have right now is: Hey, the short-term data suggests weakness, but you actually understand the fundamental reasons why the short-term data is weak, and you identified them.

The short-term data suggests weakness in that they’re losing share to Aristocrat, but there is a reason. Aristocrat launched to your Nintendo PlayStation what All the Aristocrat launched in the first half all the light wonder launches are in the second half. It’s not that you’re losing market share; it’s that nobody’s going to order your old thing when the new thing is coming out.

Nintendo is about to release the Switch 2. Nobody’s ordering the Switch 1 when the Switch 2 comes out 3 weeks later. So, you do have that natural pause. “Delayed gratification” isn’t the right word; it’s just rational.

Zach, this has been great. Is there anything else people should be thinking about, or anything else we should be talking about?

I would just summarize and say I think it’s a very safe, stable, predictable business that has a very long growth runway ahead of it, that is not sensitive to AI or likely to be impacted by AI, and that is run by the right management team. You’re buying it today at around 8 to 9 times free cash flow, and I think that free cash flow per share is going to grow at a 15% to 20%-plus clip over the next few years.

You also have a peer that has been around for a long time and has been very successful. It trades at a very high multiple, relatively speaking, as a result of that. I just think there’s a high degree of probability of those converging over time.

On the bottom end, if they don’t converge, I still think you get an IRR in line with free cash flow per share growth. More likely, you’ll get a convergence to Aristocrat, and then you’ll get a very high IRR.

Perfect. All right, cool. Well, Zach Buckley, we’re going to wrap it up there. This has been awesome. Thanks for coming on again, and we’ll chat soon.

All right, thanks, man. Appreciate it. Nice to see you again. >> A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.