Buy Enthusiast Gaming for eSports exposure, says Paradigm Capital

Paradigm Capital analyst Corey Hammill issued an update last Thursday on gaming and eSports company Enthusiast Gaming Holdings (Enthusiast Gaming Holdings Stock Quote, Chart, News TSX:EGLX), saying the company is well-positioned to take advantage of the growing in eSports and gaming in North America.

Enthusiast Gaming, which in January graduated from the Venture to the TSX, came about from a merger completed last September of media and events business for the video gaming sector Enthusiast Gaming Properties and eSports business Luminosity Gaming.

Together, the company now has a global reach of over 215 million viewers per month, over 100 gaming sites, over 900 YouTube channels, seven eSports teams and over 50 influencers.

The company recently provided its first shareholder update following the merger, describing Enthusiast’s growth strategy for 2020. Commenting on the strategy, Hammill pointed to a number of highlights, including the company’s medium-term goal of increasing revenue per user to $0.40 (in 2019, its RPU was about $0.10, Hammill said, while he is forecasting growth to $0.13 in 2020 and not until 2024/2025 before the company actually hits $0.40 per user).

The company also spoke of increasing its direct sales team as opposed to upping its game vis a vis the digital exchange model of programmatic ads.

“EGLX is building a diverse pipeline of sponsorship deals with both endemic and non-endemic brands across various industries,” wrote Hammill.

As well, Enthusiast said it aims to develop a roll-out strategy for subscription models across channels going beyond its Sims Resources (TSR) which currently has 80,000 subscribers, with the aim being to generate additional recurring, high-margin revenue streams.

Additional growth opportunities according to Enthusiast management are to be found in expanding the EG live events division, which hosts 30 gaming events globally, with Hammill writing, “EGLX will also continue its focus on increasing the value of Lumosity’s eSports organization and continue to assess accretive M&A to scale the business (such as the recent acquisition of Steel Media, a leading b2b mobile gaming events company).”

“Enthusiast Gaming Holdings (EGLX) is a uniquely positioned as one of the largest public pure-play gaming-media and eSports companies. The Enthusiast Gaming Properties segment holds one of the largest gaming-related media platforms in North America, while the eSports Luminosity segment brings direct exposure to the rapid growth of the eSports industry,” said Hammill. “Both contribute to EGXL’s extensive organic reach and will position the company as a go-to platform for brands and advertisers who are looking to monetize on the difficult-to-reach gaming community.”

With his update, the analyst maintained his “Buy” rating and $3.50 target, which derived from a 6.5x multiple of his 2021 EV/Sales estimates and at press time represented a projected one-year return of 65.9 per cent.

“We view EGLX as an attractive way for investors to gain exposure to the rapidly growing gaming and eSports industry, with a well-diversified business model, differentiated brand and further M&A opportunities in the space,” Hammill wrote.