Enthusiast Gaming has target lowered by Haywood

Haywood Capital Markets analyst Gianluca Tucci says investors can expect Enthusiast Gaming (Enthusiast Gaming Stock Quote, Charts, News, Analysts, Financials TSX:EGLX) to reach profitability later this year. Tucci reviewed the latest quarterly results from Enthusiast in a Tuesday report while lowering his target price on the stock from $4.00 to $3.50 per share.

Headquartered in Los Angeles, Enthusiast Gaming is a vertically integrated video gaming and esports company with a media and content platform for delivering fan experience. The company reported its fourth quarter and full-year financials on Monday, coming in with Q4 revenue down five per cent year-over-year to $54.0 million and gross profit up 32 per cent to $18.1 million. The company said a slowdown in the digital ad space affected its topline, although gross margin at 33.5 per cent was up from 24.1 per cent a year earlier on high growth rates in direct sales and subscription revenue.

The company took on Nick Brien as CEO at the start of March, with previous chair Adrian Montgomery moving to Board Chair.

“The Company achieved record performance in each of its main key performance indicators, including revenue, gross profit, gross margin, direct sales, and subscriptions, despite challenging macroeconomic conditions that impacted programmatic advertising revenue in the second half of the year, a period in which the Company adopted operational efficiency measures to reduce expenses,” said Brien in a press release. 

The Q4 numbers represented a miss of analysts’ estimates, where Enthusiast’s revenue, adjusted EBITDA and EPS at $54.0 million, negative $5.9 million and negative $0.08 per share, respectively, compared to Tucci’s estimates at $64.7 million, negative $0.3 million and negative $0.05 per share, respectively, and the consensus expectation at $63.3 million, negative $0.9 million and negative $0.05 million, respectively.

Tucci noted that gross margin was robust at 33.5 per cent, however, beating his estimate at 31.0 per cent, while direct sales were up 45 per cent to $12.8 million and paid subscribers rose 19 per cent year-over-year to 262,000. Tucci related that management expects margin growth to continue to outpace revenue growth in 2023.

“Enthusiast has been reporting solid growth from existing customers,” Tucci wrote. “The simplest path to continued margin growth lies in direct sales, and the company is illustrating positive momentum in this regard. Direct sales carry 50 per cent-plus gross margins.”

Tucci reported that EGLX was recently ranked as the number one gaming property for unique visitor traffic in the US, according to Comscore, while Brien’s appointment represents a refreshed vision for the company.

“[Brien’s] vision for EGLX is principally based on deepened and more meaningful relationships, driving higher margin revenue,” he said.

With the update, Tucci maintained a “Buy” rating on the stock while lowering his target to $3.50, which at press time represented a projected one-year return of 298 per cent.

“We continue to view EGLX as a misvalued gaming and media company focused on inflecting to Adjusted EBITDA profitability later this year. Notwithstanding headwinds in advertising, margins and KPIs continue to trend positively,” he said.