Canada may not have the big players when it comes to gaming and e-sports — we’ll leave that to the Activision Blizzards and Electronic Arts out there — but there are a number of interesting plays to be had in the Canadian space, stocks you may not have been paying attention to but have caught analysts’ attention nonetheless. Here are two of them with recent positive ratings from analysts.
Filling in a niche within the huge gaming sector is Vancouver-based Leaf Mobile (Leaf Mobile Stock Quote, Charts, News, Analysts, Financials TSX:LEAF), a idle/casual game developer putting out titles that fit in with a certain counter-culture vibe: Cheech & Chongs Bud Farm, Archer: Danger Phone, and Trailer Park Boys Grea$y Money are just a few from their stable.
The company has its own proprietary game development platform, IdleKit, which cuts down on development time and is also a revenue source via renting it out to other developers. And before you start thinking this is a little too niche of a name, Leaf has made inroads with some major brands out there, including recent announcements of partnerships with RuPaul’s Drag Race and NBC hit sitcom The Office, for both of which Leaf will be designing idle games.
That momentum should be enough to attract investor attention, says analyst David McFadgen of Cormark Securities, who initiated coverage of Leaf last month with a “Buy” rating and $0.60 target price, saying the mobile game industry is experiencing large growth as consumers take in greater numbers to playing games on their phones. Leaf will benefit, McFadgen said.
“Leaf has several super marquee new games backed by well-known IP that are expected to generate significant revenue in 2022 and beyond. As a result, we are forecasting organic revenue and EBITDA growth of 102 per cent and 116 per cent, respectively in 2022. We are confident that Leaf will live up to these expectations and, if so, the stock price should rise materially,” McFadgen wrote in his August 10 report.
McFadgen said the gaming industry is certainly a competitive landscape, with many well-heeled companies jockeying for market share and consumers’ attention. But the uniqueness of Leaf Mobile’s offerings set it apart.
“We believe Leaf competes with gaming companies based on quality of experience, accessibility and value provided by its games. We believe that Leaf’s Idle Kit is the only game development platform that offers a completed end-to-end solution in the Idle game genre. Some companies offer components of the Idle Kit platform. Other companies will develop games on a B2B basis for other publishers. Some of these companies also publish their own games similar to Leaf. There are many competitors with larger revenue and more resources, but we believe that Leaf is the dominant player in the idle game genre,” he said.
At the time of publication, McFadgen’s $0.60 target represented a projected one-year return of 53.3 per cent.
For a different look, there’s Toronto-based Enthusiast Gaming (Enthusiast Gaming Stock Quote, Charts, News, Analysts, Financials TSX:EGLX), a gaming and esports media and content platform company. Enthusiast started out as a Toronto exhibition event for for Nintendo fans and has moved on to operate a portfolio of websites, video channels, esports teams and events, with the company saying it’s looking to “build the world’s largest network of communities” for gamers everywhere.
The strategy is attractive, says Scotiabank analyst Jeff Fan, who launched coverage of Enthusiast in July with a “Sector Outperform” rating and $9.25 target price. Fan said while gaming is truly huge at a market expected to reach US$175.8 billion in 2021 and with an eight per cent growth rate over the next three years, most notable for Enthusiast’s case is the fact that gaming is now a lifestyle to over 50 per cent of players, making the development of a complete gaming ecosystem an interesting proposition.
“With approximately 2.9 billion global gamers, and approximately half immersed in gaming as a lifestyle, we believe this community is large enough to support its own media ecosystem,” wrote Fan in his July 28 report.
“Enthusiast Gaming is well positioned to lead this shift in the gaming community, which will be key for advertisers to reach the Gen Z audience. As an organization that began as websites for gamers by gamers, the company has developed a skill set in managing sites that contain user-generated content in an authentic way, while providing advertisers with a brand-safe location to advertise and reach the coveted Gen Z demographic,” he said.
Fan estimates Enthusiast will have revenue growth of 22 per cent in 2021 and see its gross margin expand from 18 per cent in 2020 to 21 per cent this year.
“We believe subscription revenue through social media is potentially the biggest and most profitable opportunity for Enthusiast Gaming. We think the gaming community has become significant enough for Enthusiast Gaming to extend its position to develop a social platform,” Fan said.
At the time of publication, Fan’s $9.25 target represented a projected one-year return of 41.9 per cent.
Disclaimer: Leaf Mobile is an annual sponsor of Cantech Letter.