NeoGames Stock Decline Belies Potentially Favorable Setup

NeoGames (NASDAQ:NGMS) stock is down 10.65 percent over this month and off 51 percent from its 52-week high, but at least one sell-side analyst is saying that sell-off is a case of too much, too soon and believes shares of the iLottery provider can bounce back.

NeoGames stock
NeoGames stock
Tough comps in Michigan are weighing on NeoGames stock. An analyst says those concerns are overblown. (Image: WLNS 6 News)

In a recent note to clients, Stifel analyst Steven Wieczynski reiterates a “buy” rating and a $71 price target on NeoGames. That’s nearly double the $36 handle at which the stock closed on Sept. 17.

At this point, we think the sell-off has created an extremely attractive buying opportunity for NGMS, and see a compelling setup into year-end with several potential near-term catalysts coupled with likely upside to consensus estimates from improving SAH compares/trends and impressive ramp cadence for recently launched contracts ,” said Wieczynski.

Those catalysts include the possibility of more states considering and perhaps approving internet lottery programs. As Wieczynski notes, Ohio’s legislature is in session while NeoGames has a request for proposal (RFP) pending in Connecticut and a request for information (RFI) under consideration in West Virginia.

NeoGames Stock Headwinds in Rear View Mirror

Shares of NeoGames are struggling since the Israeli gaming company announced second-quarter earnings over a month ago, which some analysts attribute to conservative guidance offered up by the operator.

Additionally, the stock was hit by news out earlier this month that Caesars Entertainment (NASDAQ:CZR) could sell up 6.12 millions shares of the iLottery company, trimming its stake to 12 percent from 24.5 percent. The casino giant inherited that stake via its $3.69 billion purchase of sportsbook operator William Hill.

Those factors are priced into NeoGames stock and now in the past, indicating there’s rebound potential into year-end, particularly as the company ramps up in states outside of Michigan — currently its marquee market.

“There is still significant growth ahead for NGMS’s non-Michigan contracts. NGMS has done a tremendous job ramping penetration in New Hampshire and Virginia, with iLottery instants running ~40 percent of total instant sales after just ~2.5 and ~0.5 years, respectively – a feat which took MI ~5 years to accomplish,” said the Stifel analyst.

In the US, NeoGames is also operational in New Hampshire, North Carolina, and Virginia, and is pursuing iLottery contracts in Alaska, Connecticut, Maryland, Massachusetts, Missouri, Ohio, and Oregon. It also provides iLottery services in Alberta, Canada and some countries in Europe.

Michigan Market Musings

With Michigan ranking as NeoGames’ largest market, the emergence of online casinos and sports betting there coupled with tough comparisons may be contributing to recent weakness in the gaming company’s shares, but invetors may be overreacting to those factors.

“After analyzing the latest iLottery sales data from the state, we think the deceleration in Y/Y growth is more just a function of NGMS finally lapping difficult compares from the stay-at-home tailwinds that benefited the broader online consumer beginning 4/2020, vs. anything structural in nature,” says Wieczynski.

The analyst adds Michigan iLottery sales are running about 100 percent ahead of last year’s levels, noting that investor fears regarding that state are overblown as it pertains to NeoGames stock.

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