Inspired Entertainment (NASDAQ:INSE) is overlooked among gaming equities, but perhaps it shouldn’t be. Some analysts argue the supplier of video gaming terminals (VGT) and software is inexpensive relative to its growth prospects.
The small-cap stock surged 11.59 percent last Friday on strong fourth-quarter revenue results, and on a rough day for gaming equities. The shares are trading higher today amid constructive commentary from the sell-side. In a note to clients today, B. Riley analyst David Bain reiterates a “buy” rating and $30 price target on Inspired. That’s more than double where the shares currently reside.
Still, shares trade for 6.1x/5.0x CY22E/CY23E EV/EBITDA, a multiple not only disconnected with more traditional casino suppliers, but one that does not reflect INSE’s omni-channel positioning, lottery initiatives, and unique, accelerating high-margin digital portfolio,” said the analyst.
He adds there’s potential upside to his forecasts because Inspired’s foreign currency forecasts and assumptions around new lottery (including iLottery) businesses are likely too conservative. Additionally, market observers aren’t yet ascribing much value to the company’s digital unit.
Inspired Could Be iLottery Leader
Online lotteries aren’t grabbing attention on par with internet casinos or sports betting. But some analysts see massive opportunity with internet lotteries, noting that market could eventually rival that of online sports wagering.
Lottery assets — interactive and traditional — are profitable and cash generators, which add to the allure of the Inspired story. Other catalysts include Inspired bolstering its balance sheet, reducing leverage and the firm’s potential participation in industry consolidation in 2022. Not only are the shares inexpensive, but Inspired is generating free cash flow — something few of its rivals are doing with regularity.
Additionally, more countries and states are turning to new lottery concepts to boost tax revenue, indicating Inspired has multiple growth levers to pull.
“We note CY21 iLottery sales were $5.1 billion (weighted to e-instant), with Washington DC launched last year and Virginia offering its first full year of results. In total, 12 states offer iLottery games to date, though we anticipate a Connecticut go-live and likely iLottery approvals in Ohio and West Virginia over the next 12 months,” notes Bain.
Inspired Interactive Intrigue
Inspired also has room to rapidly accelerate growth in the interactive gaming arena by way of its strong content library. Last December, it reached a deal with Rush Street Interactive (RSI) to supply that operator with several titles, and that’s just one example of growth opportunities in that arena.
Michigan and New Jersey currently drive the bulk of Inspired’s interactive revenue. But that’s likely to change as new regions, including Pennsylvania and Ontario, Canada, come on board.
“INSE’s Interactive growth should ramp significantly, particularly 2Q-4Q, as INSE goes live in PA (likely approval in the very near term) and Ontario. INSE has now partnered with Interactive operators representing 70% of the volume in Michigan and New Jersey. We believe each PA and Ontario will be as large as Michigan and/or New Jersey for INSE,” concludes Bain.
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