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Target drop for Enthusiast Gaming from Paradigm Capital

Paradigm Capital Markets analyst Corey Hammill’s projections for Enthusiast Gaming Holdings (Enthusiast Gaming Stock Quote, Chart, News, Analysts, Financials TSX:EGLX) have been altered and so, despite maintaining a “Buy” rating for the company, Hammill dropped his target price from $12.00/share to $9.50/share in an update to clients on Friday.

Headquartered in Toronto, Enthusiast Gaming operates an online network of approximately 100 gaming related websites, with operations in Canada, the United States and internationally.

Hammill’s latest update on Enthusiast comes after Enthusiast’s third quarter financial results were better than expected, while his lowered target relates to his assessment of the state of the industry itself with contracted peer multiples across the space and with Paradigm assigning Enthusiast a new multiple of 5x the EV/Sales multiple for 2022, which they previously had set at 6.5x.

“The company has plenty of positive momentum, especially with the closing of two recent acquisitions which expands its business into video games,” Hammill said. “Enthusiast continues to work with many blue-chip brands on potential advertising campaigns.”

The company’s Q3 financial report was headlined by record revenue of $43.3 million for a 165 per cent year-over-year increase, which also significantly beat the consensus estimate of $35.6 million and squeaked past the Paradigm projection of $41.8 million. Media and content was the primary revenue driver for the company, as the $38.7 million generated represented 89 per cent of the company’s revenue.

Enthusiast also reported an EBITDA loss of $2.8 million, which came in ahead of the Paradigm estimate of a $4 million loss and the consensus projection of a $5.2 million loss. Gross margins also continued on their upward trend, reaching 23.4 per cent in the most recent quarter.

Enthusiast also benefited greatly from increases in direct advertising revenue and paid subscriptions; in particular, the direct advertising sales return of $6.8 million not only beat the Paradigm projection of $5.9 million, it also represented 55 per cent sequential growth and a 580 per cent year-over-year jump. 

Meanwhile, paid subscriptions nearly doubled to 207,000 total on a year-over-year basis to help continue the push for recurring revenue (the company reported $2.5 million in the quarter), while also helping the company’s average revenue per user climb to $0.52 from $0.45.

The company also significantly expanded its operations through the tuck-in acquisition of GameKnot for US$2.75 million, as well as acquiring online gaming platform Addicting Games for US$34.4 million.

In his investment thesis, Hammill noted that Enthusiast’s 2020 acquisition of Omnia Media helped give Enthusiast a path to expand its margins by adding a large network of influencers and content creation channels to the Enthusiast platform, leading to more revenue from advertising and subscriptions.

“This has been an outstanding quarter for Enthusiast Gaming across our key categories,” commented Adrian Montgomery, CEO of Enthusiast Gaming in the company’s November 10 press release. “Ongoing momentum in direct sales, the acquisition of Addicting Games, and the renewal and addition of key partners continues to power revenue and gross profit numbers that demonstrate the strength of our strategy. Our team’s ability to continue acquiring accretive properties, attract quality partners, and deliver the best fan experience through our flywheel of content, creators, and communities continues to deliver against and exceed expectations.” 

Enthusiast’s quarterly results prompted Hammill to revise some of his financial estimates, raising his 2021 revenue projection from $160.2 million to $161.7 million to mark a potential year-over-year increase of 121.5 per cent and match the consensus projection; he also raised his 2022 revenue projection from $224.6 million to $228.9 million, a potential year-over-year increase of 41.6 per cent to prove more optimistic than the consensus estimate of $203.7 million.

Hammill also revised his annual EBITDA projections for the company, lowering his 2021 forecast to an $18 million loss from his previously projected $14.5 million loss, which compares favourably to the consensus estimate of a $19.1 million loss. Meanwhile, after initially projecting 2022 EBITDA to be $6.5 million positive, Hammill now projects a further loss of $2.6 million, though it still beats the consensus expectation of a $10 million loss.

Overall, Hammill encouraged investors to use Enthusiast’s media and content segment for user monetization to evaluate the stock’s investment potential.

“Given the nature of the business, it makes sense for management to invest in growth, attracting an increasing number of direct advertising clients and growing its base of recurring subscription revenue,” Hammill said. “EGLX is at the forefront of growth, ready to drive compelling margin expansion from its large viewer base.”

Overall, Enthusiast’s stock price has fallen 6.7 per cent over the course of the year, remaining in relatively steady decline after hitting a high point of $10.87/share on April 20. At press time, Hammill’s $9.50 target price represented a projected return of 100 per cent.

About The Author /

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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