East Side Games has target trimmed by Roth Capital

After third quarter earnings from Vancouver-based mobile game developer East Side Games (East Side Games Stock Quote, Charts, News, Analysts, Financials TSX:EAGR), Roth Capital Partners analyst Sean McGowan is keeping the faith in a Monday update on the company. McGowan maintained a “Buy” rating on the stock while lowering his target price from $6.00 to $5.00, still good for a projected one-year return of 279 per cent.

East Side Games develops free-to-play, casual mobile games and has titles such as RuPaul’s Drag Race Superstar, The Office: Somehow We Manage and now Star Trek Lower Decks, which launched in September. The company announced its Q3 financials on November 10, coming in with revenue up 32 per cent year-over-year to $25.0 million and an adjusted EBITDA loss of $0.7 million compared to positive $1.1 million a year earlier.

East Side Games said its Daily Active Users for the quarter rose to 298,000 compared to 244,000 for the same period last year. Management said it plans to have “a tighter focus” in 2023 on its larger IP-driven games, since those have proven most successful. 

“We will be investing in our winners as well as betting smart about what is working in the new market dynamics. We have signed deals for new IPs and games for next year with NBCUniversal, Creative Artists Agency, Jazwares, All Elite Wrestling, Diggital Dogg and others. We have also signed numerous development partnership deals with leading studios all over the world,” the company said in a press release.

Looking at the Q3 results, McGowan said the $25.0 million in revenue came in well below his estimate at $37.5 million, with the shortfall chalked up to significantly lower revenue per game from both its top-five games as well as its lesser titles. McGowan said it’s now clear that recent changes from Apple and Google on capturing user data has not only dealt a blow to online advertising but also to the ability of users to discover games, hence East Side’s doubling down on its more recognizable titles.

“This change in strategy will manifest itself in a significant reduction in the number of new games EAGR launches each year. We had assumed the company would release 20 new games in 2023; we now believe that number will approximately half that number. Although these titles will be based on more recognizable IP, we have taken a more conservative view of how much revenue each game will generate,” he said.

By the numbers, McGowan is now forecasting EAGR to generate full 2022 revenue of $121.7 million (previously $148.5 million) and EBITDA at $3.1 million (previously $9.7 million). For 2023, he is calling for revenue of $138.1 million and EBITDA of $8.5 million.