Enthusiast Gaming sees a target drop from Haywood Capital

Neal Gilmer of Haywood Capital Markets has slightly tempered his excitement around Enthusiast Gaming Holdings (Enthusiast Gaming Stock Quote, Chart, News TSX:EGLX) as he maintained a “Buy” rating but reduced his target price from $12/share to $9.50/share for a projected return of 125 per cent in an update to clients on Wednesday.

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 released preliminary numbers for its fourth quarter financial results ahead of a full release on March 24, with Gilmer noting the numbers to be above expectations.

“In our view, it is evident that management has been successful in driving organic growth supplemented by acquisition growth,” Gilmer said, who said the target drop is on account of multiple compression in the sector.

Enthusiast’s preliminary results were headlined by revenue of $56.9 million to present a 34 per cent year-over-year increase while also beating the Haywood expectation of $52.1 million in the quarter.

The company also offered a preliminary report of $13.7 million in gross profit for the quarter to mark a 69 per cent year-over-year increase, as well as increasing the projected gross margin from 23.3 per cent to 24.1 per cent.

Enthusiast also noted an 80 per cent year-over-year increase in paid subscribers, ending 2021 with just over 220,000.

“These preliminary Q4 results again demonstrate the strength of our unique model, and show our momentum heading into 2022,” said Adrian Montgomery, CEO of Enthusiast Gaming in the company’s February 8 press release. “We expect to have generated record quarterly revenues in the fourth quarter of 2021, led by our continued strength in direct sales, our ability to acquire and integrate assets such as Addicting Games and U.GG, our ability to attract and retain paying subscribers, and ultimately our flywheel of communities, creators, content, and experiences.”

All told, Comscore reports recorded 51.8 million unique web views for Enthusiast in the United States in December, with a majority of the record audience coming from Millennial and Gen Z demographics.

The company made a splash in the esports scene in December, acquiring League of Legends community U.GG, along with expanding the accompanying desktop app. According to Gilmer, Enthusiast continues to be a trusted partner as demonstrated by renewal or additional business from Proctor & Gamble, HBO Max, TikTok, Disney and Square Enix.

Furthermore, after the company completed its acquisition of Addicting Games in September, Enthusiast expanded in-app purchasing and subscription offerings for several titles including Little Big Snake, TypeRacer, ev.io, and mope.io.

“We foresee the esports division entering additional franchised and non-franchised leagues, increasing the businesses reach and driving additional advertising and sponsorship revenues,” Gilmer said. “As Enthusiast continues to expand operations, we expect to see diversification across operations and an increase in the monetization of assets.”

With the new financial quarterlies in play, Gilmer has made revisions to his overall financial projections for Enthusiast Gaming. The analyst has Enthusiast wrapping up 2021 with $167.4 million in revenue for a year-over-year increase of 129.3 per cent. From there, Gilmer projects another jump to $209.9 million in revenue for 2022, suggesting a year-over-year increase of 25.4 per cent.

In terms of valuation, Gilmer projects the company’s EV/Revenue multiple to continue its descent, dropping from the reported 6.2x in 2020 to a projected 2.7x in 2021, then to a projected 2.2x in 2022.

Gilmer also sees Enthusiast nearly doubling its gross profit, with the $37.2 million estimate to end 2021 suggesting a 98.9 per cent year-over-year increase and an implied margin of 22.2 per cent. Gilmer then projects a jump to $56.4 million in gross profit for 2022, forecasting a year-over-year increase of 51.6 per cent and implying a wider gross profit margin of 26.9 per cent.

Meanwhile, with continued investments in play, Gilmer maintains negative projections for the company’s adjusted EBITDA in 2021 ($20.6 million loss) and 2022 ($7.1 million loss).

“Enthusiast Gaming continues to build a platform for gamers to connect and to ‘own the fan experience’,” Gilmer said. “We expect the company will strategically deploy its growth capital both internally as well as through acquisition opportunities as evidenced recently that will support its growth trajectory into 2022.”

Enthusiast Gaming’s share price has dropped by 35.9 per cent over the last 12 months, though it has shown encouraging signs with a 10.7 per cent return for investors who bought in at the start of 2022. Enthusiast’s share price hit a 52-week high of $10.87/share on April 20, and is presently recovering from its 52-week low of $2.58/share, set on January 27.