Aristocrat’s (ASX: ALL) fiscal 2025 underlying net profit increased 12% to $1.6 billion, driven by strong performance in gaming machines and a full-year contribution from NeoGames. Revenue lifted 11% on last year, and operating profits grew in all segments. Still, shares fell 8% on the result.

Why it matters: Underlying net profit was about 2% better than our prior forecast. Stronger gaming performance more than offset softer growth in iGaming. We think the market was more optimistic on iGaming and recovery in daily revenue per machine, which is little changed from the interim result.

  • Daily revenue per machine fell 4% to about USD 53, reflecting product mix and promotions. We expect this to improve in fiscal 2026, supported by superior gaming performance. We maintain our fiscal 2026 underlying net profit forecast of $1.7 billion.
  • Aristocrat dominates the electronic gaming machine landscape in North America. The installed base grew by around 6% to 75,000 units, which we estimate to be more than double Light & Wonder’s. Aristocrat estimates its North American gaming operations share now sits at about 43%.

The bottom line: We raise our fair value estimate for wide-moat Aristocrat by 3% to $67, primarily reflecting the time value of money. Shares are undervalued.

  • While the average fee per day fell, it is now around 15% higher than Light & Wonder’s, whose yield fell 6% over the same period. We think this illustrates the strength of Aristocrat’s intellectual property with successful franchises like Dragon Link.
  • With its top-performing franchises and unmatched research and development spending, we believe Aristocrat can continue to gain market share. We forecast a five-year revenue compound annual growth of 7%, driven by pricing and volume growth in gaming, particularly North American leased machines, and ramp-up in iGaming.

Wide-Moat Aristocrat keeps winning in gaming machines

We expect Aristocrat Leisure to continue to dominate the electronic gaming machine market, particularly in North America. With a strong balance sheet and commanding market position, Aristocrat’s research and development expenditure is unmatched by peers. This investment is the lifeblood of any electronic gaming manufacturer, especially given rapidly changing technology and consumer demands, and allows Aristocrat to maintain game quality, differentiate products from lower-end competitors, and defend its wide economic moat.

Aristocrat is among the top three global competitors in the highly competitive EGM market, alongside International Game Technology and Light & Wonder. We estimate Aristocrat’s North American ship share is now about 27%, from around 23% in prepandemic 2019, and around 13% in 2012. We estimate IGT has a similar share of outright sales, with Light & Wonder a few percentage points behind. We estimate Aristocrat commands a number-one position in Class II and Class III leased machines with more than 40% of the installed base, bolstered by the Video Gaming Technologies acquisition in 2014. These leased, rather than purchased, machines represent the majority of American land-based sales and attract a fee-per-day arrangement (which can be fixed or performance-based). In our view, this revenue is more naturally recurring than direct EGM sales.

Bulls say

  • Aristocrat operates in a market protected from new entrants, as stringent regulatory licensing requirements in major markets create barriers to entry for new players.
  • Unlike the mature electronic gaming machine industry, the fast-growing mobile gaming market provides an avenue of strong growth for Aristocrat.
  • Already boasting a portfolio of highly regarded electronic gaming machines, Aristocrat outspends rivals on R&D, allowing it to improve its competitive position and protect its wide economic moat.

Bears say

  • In the pursuit of continued earnings growth, Aristocrat is at risk of overpaying for acquisitions in its competitively more challenged digital gaming business.
  • Aristocrat is hostage to the financial health of casinos and venues purchasing its products.
  • With less turnover likely up for grabs in the near term, heavy discounting could weigh on Aristocrat’s profitability in the fiercely competitive electronic gaming machine industry.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.