East Side Games has a 121 per cent upside, Eight Capital says

Eight Capital analyst Adhir Kadve believes East Side Games Group (East Side Games Stock Quote, Chart,
News TSX:EAGR) is pushing all the right buttons, maintaining a “Buy” rating and target price of $7.50/share for an implied return of 121.2 per cent in an update to clients on Friday.

Headquartered in Vancouver, East Side Games, formerly known as LEAF Mobile, develops and publishes free to play mobile games, with a number of titles leveraging celebrity-IP like Archer: Danger Phone, Bud Farm Idle Tycoon, Cheech & Chong Bud Farm, The Goldbergs: Back to the 80s, It's Always Sunny: The Gang Goes Mobile, Trailer Park Boys Grea$y Money, RuPaul's Drag Race Superstar and the soon to be released The Office: Somehow We Manage.

Kadve’s latest analysis came after East Side released its fourth quarter financial results, which he said to be a strong beat in relation to estimates.

“The strong performance during the quarter was due to EAGR increasing UA spending, which lead to a strong launch and subsequent performance of RuPaul's Drag Race in addition to the company's core portfolio of games,” Kadve said. “On the overall post-IDFA environment, management noted that they have lapsed the effects of Apple's (AAPL, Not Rated) IDFA changes and are seeing strong ROI's from spending, which in our view is a testament to EAGR's IP driven model.”

East Side’s quarterly report was headlined by record revenue of $28.6 million for 50 per cent sequential growth and 25 per cent year-over-year growth, while also coming in ahead of the $24.8 million projection set by the consensus and the $25.1 million projection put forth by Eight Capital.

Meanwhile, the company reported an adjusted EBITDA figure of $1.1 million for a four per cent margin, which was roughly in line with the consensus estimate of $1.4 million (six per cent margin) and the Eight Capital projection of $1.2 million for a five per cent margin.

East Side also provided updates on its audience metrics, particularly a 21 per cent year-over-year increase in Daily Active Users to 348,000, while also reporting a 53 per cent year-over-year increase in its Monthly Active Users, at a report of 1.53 million.

"This was a monumental year for ESGG and we capped it off with significant growth in Q4, achieving record quarterly revenue, annual revenue and record user numbers, in addition to launching our first Super Marquee' title, RuPaul's Drag Race Superstar,” said Darcy Taylor, CEO of East Side Games Group in the company’s March 11 press release. “The marketing landscape continued to improve in the fourth quarter, we have adapted well to Apple's IDFA changes and have been successful in our marketing campaigns with increased disciplined investing in user acquisition towards the end of the year linked to new launches and sustained returns. This contributed to an extremely successful launch of RuPaul's Drag Race Superstar which, as we mentioned last quarter, surpassed the 1 million download mark only weeks after launch.”

On the heels of its latest release, The Office: Somehow We Manage, East Side also offered more information on its 2022 plans, with plans to release nine titles over the course of 2022, headlined by its Super Marquee titles Star Trek: Lower Decks, which is currently in soft launch and expected to release in the middle of the second quarter, followed by a second half release for its Doctor Who title.

The company also noted strong early traction after the worldwide launch of The Office, though management expects a phased approach, with a slightly slower revenue build as compared to RuPaul's Drag Race, albeit with a similar revenue trajectory over a longer time frame.

“With RuPaul and The Office continuing to ramp, and eight more titles set for release through the balance of the year (vs. two total title launches in late F21), we continue to see a strong setup for EAGR in F22,” Kadve said.

The new financial report has prompted Kadve to make minor revisions to some of his financial projections, as he now forecasts revenue of $149.3 million for 2022 (previously $147.8 million), marking a 60.2 per cent year-over-year increase from the year-end report of $93.2 million. Looking ahead to 2023, Kadve now forecasts revenue of $194.9 million for a potential year-over-year increase of 30.5 per cent.

From a valuation perspective, Kadve forecasts the company's EV/Sales multiple to drop from the reported 2.5x in 2021 to a projected 1.6x in 2022, then to a projected 1.2x in 2023.

Kadve also slightly raised his adjusted EBITDA projection for 2022 from $8.3 million to $9.1 million to imply a six per cent margin, holding at the same level for 2023 with adjusted EBITDA of $11.1 million.
East Side Games Group’s stock price has dropped by 13.2 per cent over the last 12 months, with a 15.7 per cent loss since the start of 2022.However, the stock has had positive momentum since hitting a 52-week low of $2.30/share on November 11, generating a 28.3 per cent return since then.

Disclosure: East Side Games is an annual sponsor of Cantech Letter