Gaming stocks faced a brutal rejection last week as investors processed “Liberation Day” — President Trump’s strategy to impose tariffs on numerous US trading allies. Stocks of suppliers and device makers were also affected, and the situation may deteriorate for the group before it improves. 

A recent report by Stifel analyst Jeffrey Stantial highlights that gaming suppliers face “direct exposure” to global supply chains, which might be hindered due to the trade tariffs, mentioning that the impact on free cash flow (FCF) can differ among suppliers.

"While the situation remains in flux, our analysis suggests potentially meaningful unmitigated FCF impact from initial reciprocal tariffs for slot manufacturers while also potentially impacting replacement sales via operator uncertainty, consumer pullback and/or geopolitical tensions,” wrote Stantial.

In the gaming machine/slot machine sector, the approach manufacturers take to assemble devices differs from one company to another, although the majority of machines are assembled and prepared for operation in the US. Nonetheless, these companies continue to depend significantly on various Asian nations — many of which are targets for tariffs — for component sourcing. 

Light & Wonder Might Be Exposed to Tariffs 

Shares of Light & Wonder (NASDAQ: LNW) fell 10.45% last week after the slot machine giant informed investors about the lawsuit initiated by competitor Aristocrat Leisure, though some of that decline might be related to Liberation Day. 

In response to the supply disruptions caused by the coronavirus pandemic, Light & Wonder sought to decrease its reliance on sourcing from Asia, with Europe absorbing part of that demand, but this does not shield the company from the recent tariffs imposed by the White House. Furthermore, the business might feel pressure from certain Canadian clients reducing orders because of US trade tariffs imposed on that nation. 

“While we have previously noted LNW’s upcoming Investor Day and new long-term financial targets as potentially helping stabilize sentiment, we believe investors are unlikely to show much confidence in projections from any directly or indirectly impacted business in the current environment,” adds Stantial.

On the other hand, the analyst referred to International Game Technology (NYSE: IGT) as a “baby in the bathwater” opportunity due to its sale of the slots division, transforming it into a lottery-centric company. 

Gaming Supplier Stock Universe Diminishing, Yet … 

In light of the existing market turmoil, there's little to celebrate, but the realm of gaming supplier shares is set to decrease. PlayAGS (NYSE: AGS), which Stantial claims has strong fundamentals, is being acquired by Brightstar Capital Partners, while IGT’s slot machine division is merging with Everi (NYSE: EVRI) into a company that will be purchased by Apollo Global Management (NYSE: APO). 

The agreement for the acquisition between Apollo and Everi/IGT prevents the buyer from withdrawing over trade-related matters; however, Stantial pointed out that the private equity firm often engages in litigation, making “complete comfort” difficult to achieve. 

“Still, we believe the multiple paid for these assets remains reasonable despite share loss since announcement, while reiterating Apollo’s historical interest in owning IGT Gaming & the compelling industrial logic in combining EVRI FinTech with IGT systems,” concludes the analyst. “Hence, we still expect the deal to close as structured, though monitoring closely amidst unprecedented uncertainty.”