Three gaming stocks to watch from Haywood

Broad headwinds are likely to keep blowing against the media and gaming sectors, but Haywood Capital Markets analyst Gianluca Tucci still has a few stocks for investors looking to partake in the space. Tucci delivered an industry note and third quarter earnings preview on Thursday, singling out three names: Enthusiast Gaming (Enthusiast Gaming Stock Quote, Charts, News, Analysts, Financials TSX:EGLX), Bragg Gaming Group (Bragg Gaming Group Stock Quote, Charts, News, Analysts, Financials TSX:BRAG) and Playmaker Capital (Playmaker Capital Stock Quote, Charts, News, Analysts, Financials TSXV:PMKR).

It appears to be a tough road ahead for media and gaming companies, as deteriorating macroeconomic conditions and forces are likely to cut into overall advertising spend, the bread-and-butter for the industry. Tucci said he’s seeing reducing marketing budgets across many sectors of the economy in the face of operating environment headwinds, inflation-driven price pressures and rising costs of capital. 

Tucci pointed to the 2008 recession where the overall ad market dropped by between 13 and 27 per cent, depending on your sources, while in the current climate, online ad giant Alphabet recently posted a quarterly decline in YouTube ad revenues for the first time since the company segmented out those revenues three years ago.

“Broadly, advertising is slowing, but there are recession-resilient pockets within, such as iGaming,” Tucci wrote in his report.

On the plus side, Tucci noted the upcoming impact of the World Cup, to be held over one month starting on November 20. Overall, the event is predicted to have a US$2 billion positive impact on ad spend. The analyst said of the companies under Haywood’s coverage, Enthusiast Gaming and Playmaker are well-positioned to benefit from the upswing.

“We believe platforms that will benefit the most from this spend are the digital media platforms such as YouTube, Instagram, TikTok, Snap, etc. The World Cup happens once every four years and with an expanded format this year and more nations than ever involved, advertisers don’t want to miss this opportunity,” Tucci said.

Below are Tucci’s ratings, price targets and third quarter estimates for the three above companies. Note all projected returns are as of the publication date of Tucci’s report.

Stock: Enthusiast Gaming

Rating: Buy

Price Target: $5.00

Projected one-year return: 525 per cent

Third quarter revenue estimate: $55.1 million

Third quarter adjusted EBITDA estimate: -$2.1 million

“We look for EGLX to turn the corner to regularly posting positive adjusted EBITDA figures in H2/23. While the company does not presently report Adj EBITDA, we look for this to change in the coming quarters as the market landscape has evolved and growth at any cost is no longer rewarded,” Tucci wrote.

Stock: Bragg Gaming Group

Rating: Buy

Price Target: $15.00

Projected one-year return: 194 per cent

Third quarter revenue estimate: €17.1 million

Third quarter adjusted EBITDA estimate: €2.2 million

“BRAG has new content rollout plans in Michigan, New Jersey, Connecticut and Pennsylvania through Q2/23,” Tucci wrote. “In our view, the path to higher revenues is moderately de-risked by its existing penetration rate into Tier 1’s, allowing for a relatively unobstructed way to scale. We remind readers that market share in legalized gaming states is largely dominated by Tier 1 operators (FanDuel, DraftKings, BetMGM, Penn, Caesars, etc.) which are now BRAG customers via its Spin Games acquisition.”

Stock: Playmaker Capital

Rating: Buy

Price Target: $1.10

Projected one-year return: 168 per cent

Third quarter revenue estimate: $7.3 million

Third quarter adjusted EBITDA estimate: $2.0 million

Tucci said he expects the World Cup in Qatar to have an outsized impact on Playmaker’s fourth quarter results. 

“The World Cup provides a reliable lift to the global ad market every four years and will be responsible for about ten per cent of all the growth in ad dollars this year,” Tucci said, “PMKR is well-positioned to be a direct beneficiary.”