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.

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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.

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