Inspired Entertainment Could Be Inspired Rebound Story, Says Analyst

Key Takeaways

• Inspired Entertainment's shares have dipped 21.70% due to a regulatory probe but are seen as a potential rebound opportunity by analysts.
• Truist Securities maintains a "buy" rating, with a price target suggesting a 41.30% upside.
• The company shows promise in the interactive gaming sector and has reported significant momentum and revenue in its digital gaming division.

Hampered by a regulatory probe into its 2023 earnings restatements, Inspired Entertainment (NASDAQ: INSE) has seen its shares decline 21.70% over the past year. However, at least one analyst sees opportunity with the supplier of video gaming terminals (VGT) and software.

In a new report to clients, Truist Securities analyst Barry Jonas reiterated a “buy” rating and a $13 price target on Inspired, implying upside of 41.30% from the Tuesday close. Jonas noted the Securities and Exchange Commission (SEC) investigation into the gaming company’s restatement of its 2023 earnings was “presumably to verify the matter has been resolved appropriately.” Inspired highlighted the restatement and related costs in its annual report filed with the SEC yesterday.

Inspired also has room to rapidly accelerate growth in the interactive gaming arena by way of its strong content library. While the number of states permitting internet casinos remains at six, operators in those jurisdictions are using fresh content to gain market share, potentially auguring well for Inspired.

After positing fourth-quarter revenue of $78 million, which beat sell-side forecasts, and generating free cash flow of $27 million — an impressive sum for a company with a market capitalization of $237.81 million — Inspired appears poised to build on successes in digital gaming.

Citing management, Jonas observed “noted momentum in interactive has continued into the new year; last week was the highest revenue week in company history.” Inspired has a strong backlog of internet casino equipment orders and could be supported by expected growth in Brazil and other parts of Latin America.

The analyst also pointed out that Inspired management “noted Virtuals were at an inflection point and growth could be supported from new-product momentum”, adding that the executives see the company generating $105 million in free cash flow this year.

Momentum in the internet lottery space could also be additive to the Inspired Entertainment investment thesis. 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 2024. Not only are the shares inexpensive, but Inspired is generating free cash flow — something few of its rivals are doing with regularity.

Inspired also sports a decent balance sheet with $13 million available with which to repurchase its own stock — something the company halted amid the earnings restatements — and $40 million in cash on hand.

This blend of strategic growth in digital arenas, a resilient balance sheet, and the potential for significant free cash flow generation positions Inspired Entertainment as a potentially compelling rebound story in the eyes of investors and analysts alike, navigating through regulatory challenges towards a brighter, more lucrative horizon.