Neal Gilmer of Haywood Capital Markets believes Enthusiast Gaming Holdings (Enthusiast Gaming Stock Quote, Chart, News TSX:EGLX) is pushing all the right buttons, giving the company a “Buy” rating with a target price of $12.00/share and projected return of 121 per cent in an update to clients on September 8.
Founded in 2014 and headquartered in Toronto, Enthusiast Gaming is a network of gaming media properties for video game and esports fans, with more than 300 million gamers worldwide and generating over 40 billion annual views while targeting millennial and Gen Z gamers..
Gilmer’s latest analysis comes after Enthusiast Gaming announced it had acquired Addicting Games Inc., marking its entry into the casual gaming industry.
“While the transaction is expected to add to Enthusiast’s top-line, the active users are generally amongst the two demographics that are crucial to the Company’s long-term growth trajectory,” Gilmer said.
The acquisition comes in at a total consideration of US$34.4 million, of which US$10 million is in immediate cash, US$12 million in stocks, US$10.8 million in deferred payments and the rest as a convertible debenture.
Founded in 1998 and headquartered in San Francisco, Addicting Games is considered a pioneer in casual gaming, recognized for bringing attention to online casual games as well as developing and distributing innovative games through its numerous properties, developing a library of over 1,500 games played by approximately ten million gamers monthly. Its properties include AddictingGames.com, MathGames.com, Little BIG Snake, and Shockwave.com, among others, and the average Addicting Games gamer spends over 15 minutes per visit.
“I’m thrilled to announce the acquisition of Addicting Games, a pioneer in casual gaming with nearly twenty years of experience building a loyal audience of gamers,” said Adrian Montgomery, CEO of Enthusiast Gaming in the company’s September 7 press release. “Addicting Games integrates with existing advertising and subscription revenue streams and unlocks new streams such as in-game purchases, and other affiliate type deals. At the same time, our media platforms and influencers will expand the reach of Addicting Games’ current titles. I look forward to welcoming the Addicting Games team to the Enthusiast Gaming family.”
Addicting Games is Enthusiast’s fourth acquisition in the past six months, having also acquired Activision Blizzard fan community Ice Veins in March for approximately US$8.3 million, then paying approximately US$11 million in cash and stock for Tabwire, owner of the TabStats.com portal, in May. Most recently, the company acquired GameKnot, which owns chess fan community GameKnot.com, for US$2.75 million, including US$1.5 million in cash, US$750,000 in stocks, and a US$500,000 deferred payment.
The company also closed an initial public offering of US$46 million (8 million shares at US$5.75/share) in June.
Gilmer projects Enthusiast Gaming will take a significant step forward in 2021, projecting revenue of $162.3 million for a potential year-over-year increase of 122 per cent, with a further increase to $199.1 million in play for 2022, a potential year-over-year increase of 22.7 per cent. (All figures in Canadian dollars except where noted otherwise.)
He also forecasts the gross profit to double to $37.3 million in 2021, creating a potential margin of 23 per cent after the reported 2020 margin of 25.6 per cent. Gilmer’s 2022 projections have Enthusiast taking a gross profit of $51.9 million, creating a potential margin of 26.1 per cent.
However, Gilmer forecasts the adjusted EBITDA to remain negative for the next two years, projecting a $20.5 million loss for 2021 after reporting a loss of $11 million in 2020, with 2022 projected to come in at a $9.3 million loss, though the fourth quarter of 2022 projects to be the first since at least 2019 to have negative EBITDA below $1 million.
The company’s valuation data has a bit more clarity to it now, as Gilmer foresees a continued drop in the company’s EV/Revenue multiple. Previously at 54.3x in 2019, it dropped to 9.1x in 2020, with Gilmer projecting a further drop to 4.1x in 2021 and 3.3x for 2022. Meanwhile, on account of the negative adjusted EBITDA, there is not enough data to report on the EV/EBITDA multiple.
With Newzoo projecting the global gaming market to grow to $200 billion by 2023, Gilmer believes Enthusiast Gaming is in a good place to benefit from the ensuing tailwinds, whether it’s through further acquisitions and organic growth, or working to better monetize its assets.
“Enthusiast Gaming reaches over 300 million gaming enthusiasts on a monthly basis, a platform that enables it to monetize its platform through its four main pillars: Esports, Content, Talent, and Entertainment,” Gilmer said. “We expect the Company will strategically deploy its growth capital as evidenced by this most recent acquisition.”
Overall, Enthusiast Gaming’s stock price is up 8.7 per cent for the year to date, peaking at a high point of $10.87/share on April 20.
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