3 Reasons International Game Technology Stock Could Fall

Source: IGT.

International Game Technology (IGT 0.10%), the slot machine and casino equipment maker from Las Vegas, has had a difficult year. The most recent quarter disappointed investors with a 19% year-over-year revenue drop. Yet the stock is still near its year-ago value. Can long-term IGT investors win even in the face of continually disappointing revenues, or is this investment a losing bet? IGT will have some major hurdles to jump in the short and long term, and here are three reasons the stock could fall.

1. North America sales might stay depressed for a long time
In IGT's most recently reported quarter, the company announced a 19% decline in total revenue from the same period in 2013, with unit sales revenue specifically down 35% year over year. During the quarter, IGT shipped only 7,100 units, compared with 13,600 during the same period last year.

There are some interesting trends that might help to grow these sales in the long term. For one thing, Las Vegas gross gaming revenues have started to increase again in the past few years and are getting close to their all-time highs from 2007. If Las Vegas returns to its revenue-producing high from 2007, casino growth in the city may start again, meaning the need for more gaming machines from companies such as IGT. It could still be years until we see that need take shape, so it's unlikely that IGT will report many more machines sold in the next few quarters as it did the last few, and revenues will continue to show year-over-year declines in the near future, pushing the stock lower.

2. Lowered per-machine sale prices
IGT, though the biggest casino machine maker by market cap, isn't the only maker in the industry, and competitors are working to be more cost-effective in this market. IGT has had lower revenue recently not just because of reduced unit sales, but also because of lower sale prices per machine as it faces this price competition. In the most recent quarter, IGT's average machine sale price dropped from $13,300 to $11,900 year over year.

Macau development has been a wild-card factor for what could mean future regrowth for IGT. In fact, the company just signed a new deal in August with a local distributor to further its footprint in the popular Asian gaming hub. That could potentially be very lucrative, with each of the major casino companies in Macau planning to complete new megaresorts on the Cotai strip in Macau in the next 12 to 24 months.

However, as gross gaming revenues have struggled in Macau so far this year, these casino companies will also be looking to be cost-conscious. If new gaming equipment deals go to lower-cost manufacturers instead, or if they go to IGT only at lowered costs, that will take much of IGT's last big push for increased sales and per-unit revenue away, and the company will miss out on what could be a chance to prove future value growth to investors. 

3. Uncertainties with the coming merger
IGT announced this past summer that it agreed to a merger deal with Italian gaming company GTECH S.p.A. The $6.4 billion deal placed IGT shares at around $18.25 at the time of the transaction, and the news helped to pull IGT shares out of their summer slump of around $12 per share back to near their year-ago value of near $17 per share. If the merger does go through as expected, then the rise back to current levels was a good bet and current investors will still get a small bump as the shares are converted to what is likely to be a higher value than today's price. 

Source: GTECH S.p.A.

However, the deal is still subject to more reviews and litigation. If the merger gets delayed from its expected completion date of Q2 2015, or, worse, if it fails and the agreement is terminated, there is almost certainly going to be an IGT stock sell-off as investors view IGT's solo future as bleak.

Foolish final bet: IGT has some interesting prospects, but these headwinds make it a risky bet
IGT is not completely down and out. Even amid a nearly 20% revenue decline in the last quarter, the company still managed to produce a rise in net income of nearly 10% year over year during the quarter. Furthermore, increased revenues in Las Vegas, development in Macau, and the merger with GTECH could pull the company back to financial health and bring shareholders along for a good ride.

However, those potential boosts are still very uncertain, and without them, the company will probably have a bleak future. With sales that could stay depressed for quite some time in the U.S., development and sales in Macau that could easily go to lower-cost competitors, and uncertainties with the coming merger, IGT shares could fall in the short and long term. IGT looks like a good company for your watchlist for Las Vegas and Macau development and the merger with GTECH, but until those become more certain, the stock could still fall again.