Back in July in my Adventurous Investor column for the FT, I talked about the coming transformation in gaming – its move online being the biggest transformation. You can view the article HERE
But I also talked a little about the remorseless rise of e-gaming. I think this is quite possibly the next really big thing to sweep the world of content and entertainment. Here’s what I wrote back in the summer:
“ Teenagers are now bursting out of their bedrooms and gaming as a competitive, team-based sport. There are now dozens of teams playing to big audiences, both in the flesh (at stadiums) and online (watched by millions, many in Asia). Teams such as the FaZe Clan are turning into media assets, while others such as Team Liquid are bringing in huge earnings ($26m last year). One market research firm called NewZoo estimates that esports revenues hit $906m last year; a recent Canaccord report showed that the media age of fans of the PGA golf tour was 64, for English Premier League football it was 43 and for esports 25. There is one last sure sign of something big coming to a screen or stadium near you — the billionaires are moving in. Mark Cuban, who also owns the Dallas Mavericks, has bought Unikrn, an esports gambling platform, while Robert Kraft, owner of the New England Patriots, has bought esports outfit Boston Uprising. The billionaires’ money is needed to support the huge costs of running these teams. Franchise fees on Overwatch, for instance, are likely to be around $20m to $30m with revenues split three ways between players, teams, and publisher, according to Canaccord. Investors shouldn’t need reminding that there’s money to be made in games, as anyone who’s invested in the likes of Microsoft (owner of the Xbox platform), Electronic Arts and Activision will know over the past decade. Yet the majority of esports platforms are privately owned. You will find the odd micro-cap ways of playing the trend in markets such as Canada, where Enthusiast Gaming (EGLX-TSXV), a digital media company, also operates the largest video gaming expo, as is sports news interactive platform The Score (SCRX-TSXV). Epic Games is also still private and thus investors will need to work hard to figure out how to play the big trends.”
The key point here is that there are very few direct ways to invest in the e-sports niche. But analysts at Canaccord last week put out a note which suggested that there is one relatively new pure play way of accessing the space. According to Canaccord’s star media and e-sports analyst Enthusiast Gaming Holdings is an under-monetized esports pure play. The market cap is rather heady C$207m at a price of C$2.40, so it’s hardly undervalued but given the momentum in this space I can see why they’ve just made it a speculative buy with a C$3.60 target price. Anyway, here’s the broker note:
“We believe the business is well-positioned to capitalize on the long-tailed growth opportunity in the North American esports market, which we believe is growing at a 34% CAGR to US$2.1B in 2023 (previous CG market research available here). Diversified across several high-growth verticals within the space, we believe the company offers an authentic and broad-based esports platform, creating a unique sponsorship opportunity for customers. We note that the company’s operating and financial track record is limited at this point, informing our Speculative rating.
Monetizing an engaged digital audience. Enthusiast Holdings generates 63% of our 2019 total revenue estimate through advertising, targeting 150M+ engaged digital users across a network of 85+ gaming websites and 900+ YouTube channels. The company owns Luminosity Gaming, a professional esports team based in Toronto that generates income from brand sponsors, tournament earnings, and other verticals that are not so different from traditional sport.
One plus one equals three. As part of a merger transaction, core media asset Enthusiast Properties will gain access to the esports talent and social media feeds of Luminosity, expanding the company’s rich ecosystem of esports content. At the same time, Luminosity will tap into Enthusiast’s network of 150M+ engaged and passionate video game enthusiasts across North America to build brand equity. The result is an enhanced value proposition for sponsors.
Core growth opportunities. Enthusiast Holdings is increasingly seen as a consolidator with growing scale in a fragmented space. We believe that planned investments in direct sales have the potential to unlock significant value from the company’s established and growing community of engaged users. As well, a foray into a recurring subscription model via the acquisition of The Sims Resource provides access to a predictable source of high-margin revenue and a template for an expanded subscription model across the broader business.
Well-capitalized to drive value via accretive M&A. We model the business exiting 2019 with $21.4M of cash on the balance sheet. We expect this will allow Enthusiast Holdings to act opportunistically on M&A opportunities without dilution. We currently model the company burning $1M-3M per quarter in operating and investing activity over the next two years, although the company can flex its marketing spend and capital investment as appropriate to manage growth.
Valuation – Our target price of C$3.60 is derived using a DCF analysis (15.0% WACC, 4.0% TGR) and implies 9.0x our 2020E EV/Sales estimate of $35.7M. The company currently trades at 5.4x. The most relevant peers are all privately owned; public comps in the media and gaming space average in the range of 2.7x to 5.0x 2020E EV/Sales. We believe EGLX deserves a premium for its outsized growth potential and esports/video gaming focus.”