One of the worst COVID-19 hit large caps looks ready for a bounce back

This ASX 200 stock plunged by more than half since the COVID-19 bear market started. But there're signs that it could have found a bottom.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The list of ASX casualties from the coronavirus bear market is tragically long, but one of the worst hit large caps may be close to bottoming.

This isn't a time to be predicting a recovery of anything as we still have no idea how to quantify the economic cost of the COVID-19 pandemic that shaved more than 30% off the value of the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO).

But the 55% dive taken by the Aristocrat Leisure Limited (ASX: ALL) share price since the start of the bear market a little more than a month ago looks hard to justify even in the face of all the uncertainty.

Mind you, it's not the biggest underperformer on the ASX 200. The Afterpay Ltd (ASX: APT) share price, the Challenger Ltd (ASX: CGF) share price and the Oil Search Limited (ASX: OSH) share price have all lost over 70%.

Well placed to grow earnings

The key difference though is that Aristocrat is probably well placed to eke out earnings growth in spite of the looming global recession.

This growth will likely be driven by Aristocrat's digital gaming division. The pokies machine maker expanded into developing social gaming apps for smartphones.

These apps are betting games that doesn't use real money (although there are in-app purchases) and are proving to be very popular.

The rise and rise of mobile gaming

UBS tracks revenue share data for social gaming and social casino apps in the iOS and Google Play store and the broker noted that recent data is pointing towards an acceleration in the social casino market.

"We estimate that Aristocrat's social casino revenue grew by 10-15% in 1H20 to date," said UBS, which reiterated its "buy" recommendation on the stock with a 12-month price target of $39.60 a share.

Most of the growth comes from Aristocrat's RAID app, which is going gangbusters. The app enjoyed its largest monthly increase in market share of 0.9% in February, to take it to a record 3.4% share. UBS said this makes RAID the same size as the hugely popular Fortnite game!

"Anticipation around new titles such as Evermerge and titles in soft launch such as Mech Arena and Underwater Solitaire is understandably high," added the broker.

Why digital is more important

The growth of Aristocrat's digital gaming division is important for two key reasons. First, it comes at a time when the group's traditional "land-based" division customers are under intense pressure.

Casinos and other gambling venues in Australia have been forced to shut to help contain the spread of COVID-19. This means companies like Crown Resorts Ltd (ASX: CWN) and Star Entertainment Group Ltd (ASX: SGR) will be hit hard.

The other reason is because UBS found that 75% of institutional investors rate Aristocrat's digital business as the most important driver for its share price.

Foolish takeaway

This means fund managers will likely be stepping in to support the stock as long as they believe the group's social gaming apps are on a winning streak.

Even better if vast swathes of the population get quarantined due to the virus. All that free time will only drive more people to apps.

Motley Fool contributor Brendon Lau owns shares of Aristocrat Leisure Ltd. The Motley Fool Australia owns shares of and has recommended Challenger Limited and Crown Resorts Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Cheap Shares

a man leans back in his chair with his arms supporting his head as he smiles a satisfied smile while sitting at his desk with his laptop computer open in front of him.
Cheap Shares

Here are 2 exciting ASX shares rated as buys

Experts think these ASX shares are undervalued. Here’s why…

Read more »

A young woman wearing glasses and a red top looks at her laptop smiling
Cheap Shares

Where I'd invest in ASX shares after the surprise RBA decision

I think these ASX shares are too good to ignore.

Read more »

A young female investor sits in her home office looking at her ipad and smiling as she sees the QBE share price rising
Cheap Shares

Why I think these 2 ASX shares are bargain buys

These stocks look far too cheap to me.

Read more »

salesman explaining product on computer screen to couple
Cheap Shares

2 compelling ASX shares on sale right now

These stocks offer appealing value, in my opinion.

Read more »

A man thinks very carefully about his money and investments.
Cheap Shares

Here are 2 cheap ASX 100 stocks to consider buying in July

These shares are unloved by the market right now...

Read more »

Smiling couple looking at a phone at a bargain opportunity.
Cheap Shares

I think these 2 cheap ASX shares are buys for value investors in July

Here’s why these stocks look like bargains to me…

Read more »

Cheerful boyfriend showing mobile phone to girlfriend in dining room. They are spending leisure time together at home and planning their financial future.
Cheap Shares

This ASX dividend share could be the biggest bargain you can buy

This business is both really cheap and offers big dividends.

Read more »

An Australian farmer wearing a beaten-up akubra hat and work shirt leans on a fence with livestock in the background and a blue sky above.
Cheap Shares

1 stellar Australian stock down 43% from all-time high to buy and hold forever

There are plenty of reasons to like this Australian stock.

Read more »