Small-cap gaming supplier Inspired Entertainment (NASDAQ:INSE) is following other gaming technology names lower this year. But its dramatic declines are creating a valuation scenario that may be too compelling to ignore in the eyes of some analysts.
In a note to clients today, B. Riley analyst David Bain reiterates a “buy” rating on the supplier of video gaming terminals (VGT) and software. He pegged it with a $24 price target, implying the stock can more than triple from current levels. Bain’s call arrives as Inspired stock shed 31.37% over the past month — a decline that has the name looking inexpensive relative to peers.
The analyst notes investors may be overestimating two of the primary headwinds weighing on Inspired — a weakness in the British pound and a forthcoming white paper on updated UK gaming regulations.
While INSE has exposure to FX, we believe the resulting impact to earnings before interest, taxes, depreciation and amortization (EBITDA) and net free cash flow is less than investor perception,” writes the analyst. “We calculate a 10% move in the Pound equates to a ~4% or less move in EBITDA and only 1% to 2% change in net free cash flow. 70% of INSE revenue is generated in Pounds. However, well above 70% of its costs are also denominated in Pounds (dampening the impact to EBITDA).”
As for the aforementioned white paper, a release date isn’t yet known. But investors are concerned about the possibility regulators will limit maximum slot bets. That’s relevant to Inspired because online slots in the UK account for about 9% of the firm’s EBITDA. Bain notes that the average internet slot wager on Inspired games in the UK is close to the low end of the speculated maximum bet.
Another Take on Inspired
As a small-cap stock, Inspire isn’t widely followed by analysts. Among those that do cover the name, a consensus appears to be emerging that the shares are deeply undervalued.
Roth Capital analyst Edward Engel is in that camp. He reiterates a “buy” rating on the stock with a $12 price forecast, down from $16. He also says the stock is extremely inexpensive and is pricing in “dire” scenarios unlikely to arrive.
“INSE is among the cheapest stocks in our coverage, trading at 5.0x 2022E EBITDA and 19% free cash flow yield,” 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 offer earnings downgrades, INSE shares appear to be pricing in an overly dire outcome.”
Inspired is viewed as a play on the digital gaming boom, as well as the potential growth of the North American online lottery market, which some analysts estimate could eventually surpass $11 billion in value.
Inspired Catalysts
Valuation alone isn’t a reason to buy or sell a stock. But there’s more to the Inspired story than its status as a value play.
For example, the company recently went live with online gaming content offerings in Ontario, Canada, and is eyeing a near-term launch in Pennsylvania — one of the top iGamng states in the US.
“We believe INSE is in substantive talks with multiple US lotteries for iLottery content delivery contracts. We do not model for these, and expect iLottery could be a significant upside driver to CY23E/CY24E EBITDA estimates,” Bain concluded.
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