Inspired Entertainment (NASDAQ:INSE) isn’t immune to widespread retrenchment among gaming equities. Over the past month, shares of the supplier of video gaming terminals (VGT) and software are off 21.31 percent, meaning the stock is in a bear market, but some analysts believe there’s upside ahead.
In a note to clients last week, Roth Capital analyst Edward Engel initiated coverage of Inspired with a “buy” rating and a price target of $18, implying upside of more than 50 percent from the Dec. 17 close. The analyst says the company can capitalize on the digital gaming boom, leveraging robust content to augment slower growth in its retail business.
We believe INSE is an underappreciated way to gain exposure to rapidly growing digital channels, where we estimate Inspired’s Virtual Sports and iGaming segments offer a $3 billion-plus addressable market with 70 percent-plus EBITDA margins,” says Engel.
The analyst also highlights the North American iLottery market as a “white space” opportunity that could be worth approximately $11 billion and potentially bring benefits to Inspire and its investors.
Inspired Interesting Idea
As the iGaming space evolves, content is king as operators look to meet bettors’ demand for fresh offerings. Inspired is a play on that theme.
Roth’s Engel notes investors are starting to appreciate the importance of robust content streams with stocks such as Aristocrat Technologies and Scientific Games (NASDAQ:SGMS). Underscoring the importance of content, both companies are making acquisitions to that effect. Inspired has its own content toolkit investors might not yet be adequately valuing.
“We believe INSE’s Omni-channel approach offers key advantages within a highly competitive B2B iGaming industry,” adds Ingel. “Inspired can leverage internally developed content across digital and retail channels while also cross-selling B2B customers with multiple products. With Inspired’s leadership in Virtual Sports and server-based-gaming, we see reduced friction for gaining market share among iGaming and iLottery clients.”
As a small-cap stock, Inspire isn’t widely followed by analysts, among those that do cover the name, consensus appears to be emerging that the shares are deeply undervalued.
Inspired Transformation Possible
Inspired is reducing costs and firming its balance sheet. Those moves could pave the way for deal-making that could spur the stock higher in 2022.
“Since 2019, INSE has reduced interest costs from 11.5 percent to 7.8 percent and we see future opportunities to refinance costs lower as the company diversifies earnings into high margin, less capital intensive digital segments,” notes Engel. “With net-debt-to-EBITDA tracking below 3x, and potentially below 2x by YE2022, we believe a transformative acquisition in the iGaming space could be a catalyst to the stock within the next 12-months.”
The analyst notes Inspired trades at a discount to peers although it’s already generating free cash and many competitors aren’t doing that.
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