AI little threat to big gaming tech suppliers, but weaker brands more at risk: Morningstar

Artificial intelligence’s (AI’s) threat to land-based gaming and the sector’s technology suppliers “is limited”, as they are “protected by licences, regulatory relationships, and a large installed base of leased machines,” notably in the case of two of the biggest brands, Aristocrat Gaming, part of Aristocrat Leisure Ltd, and Light & Wonder Inc. That is according to a Tuesday report from Morningstar Equity Research. Though the paper notes that “the gap between strong and weak players in land-based gaming” technology supply “is widening”. Analysts Angus Hewitt and Leo Wang noted: “Shares in Aristocrat and Light & Wonder have sold off amid fears of disruption from artificial intelligence.” That included investor concerns that AI would lower the barrier to market entry for new competitors and “strengthen weaker incumbent competition”. But Morningstar suggested: “While the digital gaming businesses of both companies are vulnerable, the strength of their dominant land-based electronic gaming machine, or EGM, businesses is overlooked.” The institution stated: “Land-based EGMs dominate earnings for both Light & Wonder and Aristocrat, underpinning the bulk of our valuation for both companies. “These businesses are powerful, with top market shares, deep customer relationships, and growing installed bases.” Manufacturing and distributing a large installed base of gaming machines also required “longstanding” relationships with venue operators. Those operators are “risk-averse, optimising for revenue per machine, and unlikely to allocate valuable floor space to unproven vendors. Machine success is driven by proven game titles with sustained player engagement,” Morningstar stated. The institution estimates the two brands account for more than 60 percent of leased machines in North America and about half of outright sales. “We estimate land-based gaming will still comprise about 65 percent of earnings for Aristocrat [Leisure] by the end of the decade, and about 60 percent for Light & Wonder,” said the institution. Digital risk overblown The research house said the respective share prices of Light & Wonder and Aristocrat Leisure were “overly driven by sentiment around their digital businesses, social casino and iGaming”. Aristocrat Leisure’s share price on the Australian Securities Exchange as of 4pm market close on Tuesday was AUD63.60 (US$45.18), a 12.7-percent decline versus a 12-month peak on August 28 last year. Light & Wonder’s Australian-listed shares closed at AUD134.00 on Tuesday. That was down 26.6 percent on a 12-month high of AUD182.50 reached on January 12. “The market over indexes to digital risk. In periods of optimism around social casino and iGaming, both stocks rerate meaningfully,” Morningstar said. “As sentiment toward these segments weakens, valuation compresses back to this floor, applying digital-specific headwinds to the entire business, largely ignoring the resilience of gaming machine earnings,” it added. Morningstar noted, however, that the “gap between strong and weak players in land-based gaming is widening”. “Aristocrat is taking market share, and Light & Wonder is holding share. But smaller competitors, such as IGT and Ainsworth [Game Technology Ltd], are struggling to make durable share gains in North America,” the institution observed. Morningstar suggested AI could reinforce that divide. It noted that Aristocrat’s research and development expenditure had historically been about 12 percent to 13 percent of revenue, compared with 8 percent to 9 percent for Light & Wonder and about 7 percent for IGT. The institution said larger suppliers, which already have the necessary mathematical models, intellectual property, and regulatory and operator relationships, were better positioned to use AI tools to generate more ideas and content, “reinforcing a flywheel in which better execution, scale, and customer expertise widen the gap with smaller competitors”. Of the big two, “Aristocrat’s EGM business is the strongest, with a dominant market position and durable competitive advantages underpinning its wide economic moat,” suggested Morningstar. The memo said that “proven franchises” of slot products such as Aristocrat’s “Dragon Link” and Light & Wonder’s “Huff N’ Puff”, along with “proprietary math models, and cabinet design, form valuable intellectual property”. It stated: “While we anticipate that AI may accelerate game design and reduce development costs, it simply cannot displace the expertise, relationships, and regulatory approvals required to deliver high-performing games.” “We don’t think land-based gaming will be cannibalised by digital. Despite the rapid growth of digital casinos, the online channel doesn’t appear to be taking share from physical casinos,” the report added. In the U.S, the land-based market was “still growing”, observed Morningstar. “The number of EGM locations has increased from 16,489 in 2021 to 18,218 in 2026, despite iGaming deregulation,” it added.