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Enthusiast Gaming is still a buy, Paradigm Capital says

EGLX stock

Enthusiast GamingIt was a strong finish to a foundational year for Enthusiast Gaming (Enthusiast Gaming Stock Quote, Chart, News TSX:EGLX), according to Paradigm Capital analyst Corey Hammill, who provided a review of the company’s latest quarterly results in an update to clients on Wednesday.

Hammill maintained his “Buy” rating and $3.50 target, which at the time of publication represented a projected 12-month return of 65.9 per cent.

Toronto-based Enthusiast Gaming, which came about from a merger last year of media and events company Enthusiast Gaming Properties and eSports business Luminosity Gaming, released its fourth quarter and year ending December 31, 2019, financials on Tuesday.

The company’s Q4 featured total revenue of $9.2 million and pro forma revenue of $10 million, which was a 178-per-cent improvement compared to the pre-merger Q4 2018 of Enthusiast alone.

Over the quarter, Enthusiast completed the acquisition of mobile gaming company Steel Media and hosted its EGLX consumer gaming event in Toronto, while subsequent to the quarter’s end Enthusiast graduated to the TSX senior board and signed advertising agreements with two video game companies with together 90 million views monthly.

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“We continue to meet and in most instances exceed our operational targets across the Enthusiast platform, which alongside our strong balance sheet allows us to augment and complement our organic growth performance with strategic growth opportunities,” said CEO Adrian Montgomery in a press release.

On the current COVID-19 crisis, Montgomery said Enthusiast is keeping operational and has in fact seen an increase in engagement on its media platform.

“Following our record Q4, management is relentlessly focused on increasing both viewer engagement – which is our key differentiator – and revenue per viewer. We will continue to unlock existing and new revenue streams to accomplish this goal and management is confident in the team's ability to execute on our disciplined growth strategy,” Montgomery wrote.

Hammill said the $9.2-million Q4 top line came in well ahead of his $7.5-million forecast, as did Enthusiast’s adjusted EBITDA at a loss of $1.5 million versus Hammill’s estimate at negative $3.1 million. Gross profit came out at $3.0 million and a margin of 32.7 per cent, compared to Hammill’s forecast at $2.5 million and 33.2 per cent, respectively.

The analyst has upped his 2020 revenue per user (RPU) forecast for EGLX, seeing that the Q4 RPU was $0.13 versus his $0.09 estimate and management’s commentary that the strong revenue growth was due to higher engagement of viewers, higher subscription revenue and expansion of its direct sales — Hammill pointed out that Enthusiast is building a pipeline of sponsorship deals which should materialize by the second half of 2020.

On the COVID-19-induced business environment, Hammill said EGLX should weather the headwinds well, due to gamers spending more time at home and thus online, while the company’s events segment is likely to be less impacted due to the favourable timing of the pandemic vis a vis EGLX’s events for 2020.

As one of the largest public pure-play gaming-media and eSports companies, Enthusiast is “uniquely positioned,” Hammill said, as a go-to platform for brands and advertisers looking to monetize on the difficult-to-reach gaming community.

“We view EGLX as an attractive way for investors to gain exposure to the rapidly growing gaming and eSports industry, as it is one of the largest organic gaming communities,” said Hammill.

“After making slight upward adjustments to our 2020 and forward-looking revenue forecasts to reflect stronger-than-expected growth and increased media activity in H1/20 due to COVID-19 (2020 increased to $37.3 million from $35.1 million), we are maintaining our Buy rating and $3.50 target (6.5x FY21e EV/Sales) with the stock trading at ~3.0x 2021e,” Hammill wrote.

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Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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