Where is Enthusiast Gaming headed?

It took a few months but Canadian gaming media company Enthusiast Gaming (Enthusiast Gaming Stock Quote, Charts, News, Analysts, Financials TSX:EGLX) has now pretty much lost all the gains it made over the first stretch of the year, which puts investors in a quandary: what do you do with a company that’s still in a heavy growth phase but seems to be out of favour with the market?

Portfolio manager Robert McWhirter says if you care about company profitability you put it back on the pile and wait for positive earnings down the line.

“This is a [case of] growth by acquisition. They’re a holding company, and so you end up having a platform of video games and communities, if you wish, of each unique video game where people communicate back and forth,” said McWhirter, president of Selective Asset Management, who spoke on BNN Bloomberg on Friday.

“So, part of the attempt to end up servicing value in the company is [in] advertising to those unique communities and to be able to advertise in general to the very attractive demographics of their client base as well,” he said.

Taking part in the huge and still expanding video game market globally, Enthusiast owns a collection of websites, video channels and e-sports teams and events, with the company boasting a reach of 300 million gamers globally and more than 40 billion annual views. 

Enthusiast has been building out its gaming ecosystem with lots of M&A activity, including two acquisitions so far in September of casual game developer Addicting Games and chess players community site GameKnot. 

Last month, Enthusiast reported a huge uptick in quarterly revenue ($37.1 million for its second quarter 2021 compared to $7.0 million a year earlier) with the rise related to subscription growth as well as acquired businesses. 

“After listing on the Nasdaq, completing two major acquisitions and raising $60.1 million to further accelerate our accretive M&A strategy, this has been an exemplary quarter for Enthusiast Gaming,” said Adrian Montgomery, CEO, in an August 10 press release. “We expect to see sequential revenue growth and margin improvements throughout the remainder of the year, driven by momentum in direct sales and our pipeline of acquisitions.”

“While we continue to grow our subscription business from current and newly acquired properties, the game-changer for this vertical is expected to come from Project GG and its premium subscription offering, which will launch as an exclusive alpha to select gamers in late September. Our team’s ability to continue acquiring accretive properties, attract quality partners, and deliver fresh content to our fan communities continues to exceed expectations,” Montgomery said.

Enthusiast counted about 155,000 paid subscribers by the end of the Q2 compared to 111,000 a year earlier, while the company’s e-sports division, Luminosity Gaming, was reported to be the most-watched team on the Twitch platform for each month of the quarter. At the same time, Enthusiast’s net loss was $12.8 million or $0.11 per share compared to a loss of $5.2 million or $0.07 per share a year ago.

McWhirter says it’s the long road to positive earnings that are a problem for him.

“The thing is growing quite well with regard to sales. The challenge is that earnings estimates from analysts for 2021 are that they’ll lose 31 cents a share and that will improve by about 50 per cent in 2022 but they’re still going to lose, unfortunately, about 20 cents per share,” McWhirter said.

“So, yes, [they’re] continuing to grow and it’s a potential acquisition candidate because of that growth, but because I’m a more of a near-term, free cash flow generator opportunist, it’s a company that I have owned in the past but I don’t own at the moment,” he said.

“I’m more inclined to buy other companies that are profit-generating,” McWhirter said. “That being said, Shopify and others have left me in the weeds because they’ve been able to have a similar kind of growth while still losing money. And I think Enthusiast, with a market cap of $700 million, will continue to do well going forward.”

Enthusiast’s share price began climbing late last year, going from about $1.50 to as high as $10.00 by April, 2021. But the stock has fallen back hard and is now trading around $5.50.

Scotia Capital analyst Jeff Fan recently initiated coverage of Enthusiast Gaming with a “Sector Outperform” rating and $9.25 one-year target, saying the company has the cash on hand to keep growing by M&A while the potential to develop a social media platform could prove very lucrative.

“In our opinion, Enthusiast Gaming’s valuation has room for expansion based on higher growth relative to its direct peers and optionality related to the natural expansion into social media,” said Fan in a July 28 report.

At press time, Fan’s $9.25 target represented a projected return of 42 per cent.