Key points:
• A still under-appreciated broader gaming ecosystem. Despite explosive growth in video gaming, we believe the “broader” gaming ecosystem including gaming video content, dedicated news and fan websites, esports and live events, is still under-appreciated by many investors in terms of its size, influence and growth potential. We believe secular growth in the video game industry should translate directly into a growing broader ecosystem for gaming media companies. We also believe this broader gaming ecosystem should be a structural winner as our mid-2020s content inflection period approaches.
• Transition to monetization should improve earnings visibility and be a catalyst for the stock. Enthusiast Gaming is undergoing a transition from "proof of concept" under a first-mover aggregation strategy, to one of monetization. With a reach of 300MM+ gamers, we believe Enthusiast Gaming has now established itself as a leading gaming media platform with scaled access to a highly coveted Gen Z and Millennial audience. As a result, we believe the company is very well positioned to now fully exploit monetization opportunities by instituting a multi-revenue stream playbook with a near-term focus on direct advertising sales, subscription revenues and content licensing revenues. We forecast an increase in revenues from $159MM in 2021E (+24% YoY on a proforma basis) to $337MM by 2025E (+21% CAGR).
• A unique gaming media pure-play that can garner a scarcity premium. Within the Canadian public market, we believe there is relatively limited opportunity for investors to gain pure-play exposure to the global gaming ecosystem. With greater ecosystem appreciation and improving earnings visibility, we believe Enthusiast Gaming can garner a growing scarcity premium as a gaming media pure-play.
• Current levels provide an attractive and timely entry point. Our price Our price target of $9 is based on the average of: (i) an EV/revenue multiple of 5x our two year blended multiple estimate; and (ii) a DCF valuation incorporating a WACC of 9.00% and a terminal EV/EBITDA multiple of 10.0x. At a 2.7x FTM EV/revenue multiple versus ~5x for its closest peers, we view current levels an attractive and timely entry point. We believe delivering sustained double-digit revenue growth and gross margin expansion in H2/21 and through 2022 are two "financial keys" to unlocking catalysts.