Scotia Capital analyst Jeff Fan has initiated coverage on Enthusiast Gaming Holdings Inc. (Enthusiast Gaming Stock Quote, Chart, News TSX:EGLX), setting a “Sector Outperform” rating with a target price of $9.25/share. In a report on Wednesday, Fan said he expects a solid revenue ramp as Enthusiast builds out its gaming media ecosystem in the huge but still growing gaming industry.
Originally conceived as a Toronto exhibition event for fans of the blog Nintendo Enthusiast, Enthusiast Gaming now operates as a network of gaming media properties for video game and esports fans to connect and engage, serving more than 300 million gamers worldwide and generating over 40 billion annual views, with a target on millennial and Gen Z gamers.
With Newzoo reporting the gaming industry to be worth approximately $175 billion with eight per cent annual growth, Fan believes Enthusiast is in a prime position to continue its evolution.
“Enthusiast Gaming offers investors unmatched direct exposure to the high-growth gaming media industry, which is attracting large advertisers,” Fan said.
Enthusiast Gaming has grown rapidly over the last few years, as it now owns over 100 gaming websites and over 100 YouTube channels.
The company has three primary pillars of revenue generation: Media and content, which includes gaming news and entertainment websites, along with platforms for talent gained through the company’s acquisition of Omnia in the second quarter of 2020. It also generates revenues through subscription-based content, which Fan believes is the company’s biggest growth opportunity going forward and includes content like gaming add-ons, premium blogs and Enthusiast’s upcoming social network, Project GG.
The final revenue pillar for the company is esports and entertainment, including affiliations with professional players and its own venture, Team Luminosity, along with hosting and participating in expo events.
Fan said Enthusiast Gaming has significant corporate backing in its board of directors, with the most notable names being chairman Francesco Aquilini, managing partner of the Aquilini Investment Group which owns the NHL’s Vancouver Canucks, recent appointee John Albright of Relay Ventures in a director capacity, and Richard Sherman of the NFL’s San Francisco 49ers.
The company has made moves to expand its reach, starting in May by closing the acquisition of Icy Veins, one the largest independent Activision Blizzard fan communities with over 3 billion lifetime content views since it was founded in 2011, for €7 million. Enthusiast then followed up with the acquisition of Tabwire for US$11 million, with the intent of accelerating the Project GG social network’s development by integrating Tabwire’s TabStats platform for gamers.
Enthusiast has also formed a number of key and interesting partnerships just within the current financial quarter alone, including a partnership with British band Coldplay to promote a remix of its single ‘Higher Power,’ a partnership with Torstar Corporation to create an original online news platform and community named AFK and securing an 18-month contract extension with G FUEL to promote its line-up of gaming and esports energy and hydration drinks, including a limited edition G FUEL flavour.
“This sponsorship renewal is an important milestone for Enthusiast Gaming as it is another proof point that we are delivering value to our direct sales clients,” said Enthusiast CEO Adrian Montgomery in the company’s July 27 press release announcing the G FUEL extension. “We are thrilled to continue to be working alongside G FUEL, an iconic brand for gamers, as we give our fans the envelope-pushing content they have come to know and love us for.”
From a financial standpoint, Fan sees Enthusiast Gaming’s revenue growing steadily through the middle of the 2020s, projecting double-digit year-over-year increases every year from 2021 through 2024 before dropping to a 9.6 per cent year-over-year increase in 2025. Fan is calling for the company to be EBITDA-positive by 2024.
For 2021 and 2022 revenue, the analyst has estimated $155.1 million and $184.0 million, respectively, and for 2021 and 2022 adjusted EBITDA, Fan has estimated losses of $17.3 million and $17.9 million, respectively. Fan sees 2025 as a crucial year, as he believes the company will have its first positive earnings-per-share return ($0.02/share), as well as having its first positive free cash flow run at $15.2 million compared to a projected $5.9 million in net debt.
“We believe Enthusiast Gaming deserves a premium valuation relative to digital media because we expect it to grow faster, driven by its focus on gaming,” Fan wrote. “As the market starts to appreciate the tremendous social media opportunity of Project GG, we also believe Enthusiast Gaming’s valuation will begin to migrate toward the social media group. The success of Project GG is not factored into the company’s forecasts or valuation; therefore, we believe this initiative represents a free option.”
EGLX shot up the charts starting this past November where the stock went from sub-$2.00 territory to as high as $10.48 by April. Since then, EGLX has dropped down to the $6.00 range. At the time of publication, Enthusiast Gaming was trading at $6.52 per share, while Fan’s $9.25 per share target price represented a projected one-year return of 41.9 per cent.