Breakout Stock Tuesday’s TSX breakouts: An oversold stock that is forecast to double in value by 7 analysts
On today’s Breakouts report, there are just seven stocks on the positive breakouts list (stocks with positive price momentum), and 146 stocks are on the negative breakouts list (stocks with negative price momentum). When the number of stocks on a negative breakouts list is unusually high, this often signals a bottom is nearing in the stock market.
Discussed today is a stock that appeared on the negative breakouts list on Monday – Enthusiast Gaming Holdings Inc. On Monday, the stock continued to slide and briefly entered oversold territory before the share price snapped back and closed the day with a 2.4 per cent gain.
Since April, the share price has declined 46 per cent. Despite this sharp move lower, the stock has rallied 30 per cent year-to-date. The share price may have already put in a bottom, or be close to doing so. The stock has a unanimous buy recommendation from seven analysts. The average target price suggests that the share price may rise 109 per cent over the next year.
A brief outline on Enthusiast Gaming is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based Enthusiast Gaming has web and video platforms that people can visit and see video game and esports content. The company has an audience of over 300-million monthly active viewers, comprised mainly of zoomers (Generation Z) and millennials who are between 18 and 35 years old.
The company has three main reporting segments. In 2020, the company’s revenue breakdown was 83.5 per cent from media and content, 8.5 per cent from subscriptions, and 8 per cent from esports and entertainment. Its largest segment, media and content, has more than 100 gaming websites containing content such as video game live streaming, gaming reviews, chats, videos, and message boards. Its web platform has more than two billion page views each quarter, and the company’s video platform has more than seven billion views each quarter. The company earns revenue from ads placed on these platforms.
There is seasonality in the company’s operations with the first quarter typically the weakest and the fourth quarter typically the strongest due to the nature of the digital advertising market.
The stock trades on the Toronto Stock Exchange and the Nasdaq under the same ticker, EGLX. In April, the stock began trading on the Nasdaq – a milestone for the company.
Quarterly earnings results
After the market closed on May 12, the company reported its first-quarter financial results. Revenue was $30-million, up from $7.1-million reported during the same period last year, driven by acquisition growth. Reported revenue was in-line with the Street’s forecast. Gross profit came in at $5.9-million (gross profit margin of 19.7 per cent), up from $3.3-million (gross profit margin of 46 per cent) reported last year. Its gross profit margin was negatively impacted from the acquisition of Omnia Media Inc., which was completed on Aug. 31, 2020 (Los Angeles-based Omnia offered Enthusiast Gaming a YouTube video gaming network with over 3.2 billion monthly video views). Management believes the gross profit margin will increased back to historical levels over time. At the end of the first-quarter, paid subscribers totaled 137,000, up from 92,000 reported last year. On the earnings call, management indicated that its paid subscribers expanded to 145,000 as of May 13.
Investment thesis
- Unique Canadian growth stock operating in the video game industry. Management guided to 20 per cent revenue growth in 2021.
- Organic, or internal, growth. Expected to be achieved by increasing direct sales (higher revenue compared to programmatic advertising), expanding its paid subscriber base (provides recurring revenue), reducing churn by shifted subscriptions to annual subscriptions instead of monthly subscriptions, higher advertising rates, and Project GG that will be launched later this year with enhanced subscriptions offered on this platform.
- Acquisition growth. For instance, adding more video game communities.
- Significant insider ownership. Insiders own approximately 24 per cent of the common shares outstanding, aligning their interests with those of its shareholders.
- Potential catalyst: The Street anticipates the company will report positive EBITDA (earnings before interest, taxes, depreciation and amortization) in 2022.
- Risks to be aware of: 1) Frequent financings to fund its growth. In Feb., the company completed a $58.7-million bought deal financing, issuing shares at a price of $5.75 per share. In June, the company completed a US$46-million financing, issuing shares at a price of US$5.75 per share. 2) Foreign exchange. Most of the company’s revenue is in U.S. dollars but the company’s financial results are reported in Canadian dollars.
Dividend policy
Management is focused on retaining capital to fund the company’s growth. Consequently, the company does not pay its shareholders a dividend.
Analysts’ recommendations
This small-cap stock has a unanimous “buy” recommendation from seven analysts.
North American firms providing research covering on the company are: Alliance Global Partners, B. Riley, Canaccord Genuity, Colliers Securities, Haywood Securities, HC Wainwright & Co., and Paradigm Capital.
Revised recommendations
In June, one analyst revised his target price. Canaccord’s Robert Young trimmed his target price to $11.50 from $12.
Financial forecasts
The consensus revenue estimates are $158-million in 2021, up from $73-million reported in 2020 (pro forma $127.6-million), and expected to rise to $199-million in 2022. The Street is anticipating Enthusiast Gaming to report positive EBITDA next year. The consensus EBITDA estimates are a loss of $10-million in 2021 and positive $3.2-million in 2022.
Top line forecasts have been rising. To illustrate, four months ago, the consensus revenue estimates were $151-million for 2021 and $179-million for 2022.
On the fourth-quarter earnings call held in March, chief financial officer Alex Macdonald stated that he expects revenue to increase 20 per cent in 2021 compared to 2020 pro forma revenue of $127.6-million, implying revenue of $153-million in 2021.
Valuation
According to Refinitiv, the stock is trading at an enterprise value-to-sales multiple of 3.7 times the 2022 consensus estimate.
The average 12-month target price is $12.26, implying the stock price will more than double with 109 per cent upside potential over the next 12 months.
Insider transaction history
Year-to-date, there has not been any trading activity in the public market reported by insiders.
Chart watch
Year-to-date, the share price is up 30 per cent. Between Nov. 2020 and April 2021, the share price was in an uptrend. On April 20, the stock price closed at a record high of $10.87. However, since then the share price has plunged 46 per cent, closing at $5.87 on July 19.
On July 19, the stock briefly entered oversold territory when the relative strength index (RSI) declined to 30. Generally, an RSI reading at or below 30 reflects an oversold condition. That day, the share price opened in negative territory, trading at a low of $5.43, before recovering to close the day with a 2.4 per cent gain.
In terms of key technical resistance and support levels, the stock price has a ceiling of resistance around $8, and major resistance between $10 and $11. Looking at the downside, the share price has strong technical support around $5.50.