The launch of Megabucks by International Game Technologies (IGT) in 1986 changed the slot machine business forever. It was the first time a large number of individual machines were connected into a network that spanned an entire state. With thousands of players feeding the same network, the jackpot pool could reach life-changing sums and create lottery-sized hype. The complication was that if one lucky punter struck a jackpot early on, it could bankrupt a single small casino in the network. The solution was a novel business model: instead of an outright machine sale or a flat-fee rental, units were leased to casinos with IGT retaining a percentage of each machine’s winnings (and covering the jackpot liability). The “participation lease” was born. A decade later, when IGT released its colossal hit, Wheel of Fortune, it employed this business model to lucrative effect, inspiring manufacturers to distribute more and more of their premium games (whether networked or not) under participation leases over time.
IGT competitor, Aristocrat, was paying attention. While it didn’t invent the model, Aristocrat has been its keenest adopter. Over the past two decades, Aristocrat’s installed base of leased units in North America has expanded 12-fold from 6,200 to 77,200, and claims a 38% market share of leased units. Today, each unit pulls in US$53 per day on average for the company, contributing 70% of regional revenues. What was once a lumpy business bound to casino capex cycles and the hit-or-miss nature of new releases has steadily transformed itself into a relatively steady cash flow generator.
Sources: Aristocrat Leisure, Contrarius Research
Adopting a good business model is important, but market share gains and losses in the slot machine industry are inextricably linked to the attractiveness and quality of a company’s games. Aristocrat has been remarkably successful at releasing top-performing titles and growing its market share over time. Securing 18 of last year’s top 25 premium leased games in North America, for example, clearly demonstrates its market-leading game development expertise. It has built an unrivaled portfolio of gaming brands that, on average, generate 1.4x as much win-per-day as the typical unit on casino floors. Such results earn the company more and more floor space allocation over time. Meanwhile, strong resulting cash flows allow Aristocrat to outspend rivals on the R&D needed for its next crop of games. This virtuous cycle of expertise, brands, growing scale, cash flows and R&D coalesce into a powerful competitive advantage.
Unsurprisingly, Aristocrat’s share price has done well—up 4-fold over the past ten years. Interestingly, however, the company’s underlying earnings have done even better. Today, Aristocrat trades on 26x our estimate of underlying earnings, in the lower half of its historic trading range.
Note: The chart above displays the monthly ratio of Aristocrat’s market capitalisation divided by its normalised net profit after tax before amortisation of acquired intangibles.
Sources: Aristocrat Leisure, Contrarius Research
A stereotypical value investor looking for out-of-favour shares relegated to the bargain bin may be unwilling to own shares trading above 20x earnings. We don’t subscribe to such narrow definitions of value, and employ our long-term, bottom-up, valuation-based approach to analyse each share on its own merits. In the case of Aristocrat, we conclude that the current multiple is actually an attractive price to pay for a business with such strong earnings growth potential. In particular, we believe the market is overlooking the company’s ability to capitalise on newer gaming formats and improve margins.
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The central idea is to take what Aristocrat does best—making engaging games—and apply this expertise to other gaming areas. This includes the following four formats that are believed to be natural extensions to and complements of its core slot machine business.
While online real-money slot machine gaming (“iGaming”) is common in the UK and parts of Europe, it is outlawed in Australia and, until recently, the United States. Thus far, seven US states have legalised iGaming with more expected to follow, resulting in a very fast-growing market with significant potential. Aristocrat isn’t building a consumer-facing iGaming platform (the online equivalent of a casino), but is instead applying its expertise and brands to build the best games which it is then happy to distribute on as many platforms as possible. This mirrors its successful approach to land-based casino gaming, and we believe the company is ideally placed to win market share over time. Aristocrat currently claims less than 4% of the market (a figure that has roughly doubled over the past year), suggesting ample room for growth.
Sources: American Gaming Association, Contrarius Research
Through a recent acquisition, Aristocrat owns the dominant business helping US state lotteries expand and thrive online. This is another market with exceptional growth potential, and innovative products such as eInstants (online instant scratch cards) play right into Aristocrat’s area of expertise.
While similar in concept to iGaming (without the cash withdrawals), the online social casino market is large, mature, and profitable. Aristocrat has carved out a decent market share over the past decade. A big structural cost is the 30% platform fee charged by the mobile operating systems (iOS, Android). Shifting payments off-platform cuts out this fee, and this has been a focus area for the company. As a result, we anticipate a reasonably good earnings trajectory despite a fairly mature topline.
US gaming regulations differ substantially by state, and there are a number of state-specific casino-like offerings where Aristocrat can apply its expertise, including video lottery terminals, historical horse racing machines, coin operated amusement machines, and charitable electronic pull-tabs. Units addressing adjacencies now make up more than a fifth of Aristocrat’s outright unit sales.
Aristocrat’s growing scale and ability to spread game development costs across a range of formats and regions is expected to result in operating efficiencies and improving margins. On top of this, contemporary AI advancements appear ideally suited to help Aristocrat lower costs. This includes faster and cheaper content design, better quality data insights, as well as quicker prototyping, testing, quality control, and cross-platform porting. For example, by embedding AI tools into its creative workflow, Aristocrat’s online social casino team developed 75% more creative assets in 2025 than it did in 2021 with nearly 20% fewer artists & designers. In some sectors AI-linked cost efficiencies may end up being competed away, but Aristocrat is a clear leader in a fairly concentrated industry, which suggests to us that there is a good chance that these sorts of gains can translate into higher margins over time.
It appears to us that the market is underappreciating Aristocrat’s future earnings growth, particularly in light of its progress in additional gaming formats and the prospect of AI-driven cost efficiencies. In our view, Aristocrat currently trades at an attractive price relative to its earnings outlook, and is a Top 10 holding in the Contrarius Australia Equity Fund at quarter-end.
Disclaimer: This article is based on a commentary prepared by Contrarius Investment Advisory Pty Limited (“Contrarius Australia”, AFSL 506315), investment manager of the Contrarius Australia Equity Fund (the “Fund”, ARSN 664 226 331). Equity Trustees Limited (“Equity Trustees”) (ABN 46 004 031 298), AFSL 240975, is the Responsible Entity for the Fund. Equity Trustees is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). Information is valid as at 30 June 2026. This information is general in nature and has been prepared without taking into account your personal objectives, financial situation, or needs. Before acting on this information, you should consider its appropriateness and should read the relevant Financial Services Guide (FSG), Product Disclosure Statement (PDS) and Target Market Determination (TMD) available at www.contrarius.com.au. The article is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, neither Contrarius Australia, Equity Trustees, nor any of their related parties, directors or employees, nor InvestmentMarkets (Aust) Pty. Ltd. as publisher, provide any warranty of accuracy or reliability in relation to such information, or accept any liability to any person who relies on it. Interested parties should seek independent professional advice prior to acting on any information presented. Past performance is not a reliable indicator of future performance. Funds managed or distributed by Contrarius Australia may have a position in any of the securities referred to in this article, and such positions are subject to change at any time without notice.
Chris Watson
Director at Contrarius Investment Advisory Pty Limited.
Chris joined Contrarius Australia in January 2021. Chris was previously a director of Contrarius Investment Advisory Limited ("CIAL") in the United Kingdom from June 2017 until June 2018. He was employed by CIAL as an investment analyst from April 2012 until June 2018. Chris also previously worked for Allan Gray Ltd, South Africa’s largest privately-owned investment firm. He holds a Bachelor of Business Science (Quantitative Finance) from the University of Cape Town, and is a CFA and a CMT charterholder.
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