Three Canadian gaming and e-sports stocks for your portfolio

The Canadian technology sector has a number of interesting plays for the year ahead that play into macro trends of the moment, from supply chain management software companies like Kinaxis and IT solutions names like CGI and Converge Technology to more speculative names in the electric vehicle industry like Ballard Power and Lion Electric. Another topical space is in gaming, e-sports and online betting, all of which are projected to show strong growth in upcoming years. And Cantech has three names for investors, all with recent Buy ratings from analysts.

LEAF Mobile (Leaf Mobile Stock Quote, Charts, News, Analysts, Financials TSX:LEAF) is a game developer in the casual gaming space with a range of titles catering to alternative and niche or cult corners of gamers. Think Cheech & Chong and Trailer Park Boys but also RuPaul and the Office. LEAF also has a proprietary development platform, IdleKit, that other developers are now using to build their narrative-driven idle games.

The Vancouver-based company has really taken off this year through two major acquisitions in EastSideGames and Truly Social Games, adding more depth to its development pool and give more optionality to the company’s IdleKit software. That’s meant a boost in revenue for LEAF which registered a $19.0 million topline in its third quarter 2021 with a nine-month adjusted EBITDA of $6.3 million. 

Haywood Capital Markets analyst Neal Gilmer likes the trajectory LEAF has been following and pointed in a recent report to the company’s launch of RuPaul’s Drag Race Superstar free-to-play game at the end of October, which has already gained what Gilmer described as impressive traction among both IOS and Android users, reaching the #1 spot for Simulation games in one country and in the top ten in 11 countries, according to App Annie.

“We believe LEAF Mobile has created a strong free-to-play mobile game development platform poised for growth and potential acquisition opportunities,” Gilmer wrote in a November 1 update to clients. “The launch of the RuPaul Drag Race provides an opportunity for the company to drive revenue growth into 2022 along with other titles expected to be released between now and the end of 2021.”

With his update, Gilmer reiterated his “Buy” rating and $6.50 target price for LEAF, which represented a projected one-year return of 150 per cent. (All returns are as of the publication date of the respective analyst’s report.)

Toronto-based Enthusiast Gaming (Enthusiast Gaming Stock Quote, Charts, News, Analysts, Financials TSX:EGLX) fits into the sector as a media and content platform company with websites, video channels and events for e-sports and gaming fans. The company also has a stable of professional e-sports teams under its Luminosity Gaming segment and recently entered the casual game space through acquiring game developer Addicting Games. All told, Enthusiast is creating what it sees as a complete fan experience for gaming culture.

The stock has bounced around a lot over the past year, going from $1.44 per share last November to almost $11.00 by this past April. EGLX is currently around the $5.00 mark, but Paradigm Capital analyst Corey Hammill sees upside from here.

Hammill reviewed Enthusiast’s latest quarterly results in a November 12 report, saying the numbers came in better than expected, with record Q3 revenue of $43.3 million, up 165 per cent year-over-year and better than Hammill’s estimate at $41.8 million and the consensus call of $35.6 million. The company’s EBITDA loss of $2.8 million was also above Hammill’s forecast for negative $4.0 million and the Street’s negative $5.2 million.

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

Hammill maintained his “Buy” rating but dropped his target from $12.00 to $9.50 after a broad contraction in peer multiples. The new target represented a projected return of 100 per cent.

Last up is Toronto-based Rivalry Corp (Rivalry Corp Stock Quote, Charts, News, Analysts, Financials TSXV:RVLY), which is an online betting platform for both e-sports and traditional sports betting. Started in 2016, Rivalry went live with its proprietary sportsbook platform in August 2018 in e-sports and then in 2020 with a traditional sports betting offering, followed up by a casino addition called Rushlane in May of this year.

Rivalry raised US$22 million in funding and made its TSX Venture debut on October 5, with the stock so far trending downward. But Eight Capital analyst Adhir Kadve likes the name, saying in a November 4 coverage initiation that Rivalry is building a unique betting platform fit for the under thirty-year-old demographic.

“Rivalry aims to create true product differentiation by focusing on a user experience catered to this incredibly valuable demographic and building brand affinity with them, with the ultimate goal to cross-sell them from e-sports into their other product offerings such as traditional sports betting and casino offerings. In our view, Rivalry offers investors exposure to the growth of both e-sports and traditional sports betting in both regulated and grey markets globally,” Kadve wrote.

With his coverage launch, Kadve started Rivalry off with a “Buy” rating and $4.00 target, which at press time represented a projected return of 72 per cent.

 Disclosure: LEAF Mobile is an annual sponsor of Cantech Letter.