While its fourth-quarter financial results missed expectations, H.C. Wainwright analyst Scott Buck said his “long-term optimism remains in place” for Enthusiast Gaming Holdings Inc. (
,
EGLX-T) as its “shifting” product mix moves it closer to profitability.
After the bell on Monday, the Toronto-based digital media company reported revenue of $54-million, down 5.2 per cent year-over-year and well below the analyst’s $67-million estimate. Also pointing to higher operating expenses, Mr. Buck calculated Enthusiast’s adjusted EBITDA loss to be $3.3-million, missing his projection of a $600,000 profit.
“The revenue miss was driven by macroeconomic pressure on advertising rates,” he said. “However, the company was able to partially offset this industry weakness by growing higher margin direct sales and subscription revenue during the quarter. While we expect these CPM [cost per thousand impression] headwinds to remain in place through at least 1H23, continued strength in direct sales and subscriptions should continue to expand gross margin in 2023, resulting in positive quarterly adj. EBITDA by year-end. Should CPMs improve before 2H23, we would expect the company to achieve positive adj. EBITDA ahead of our model.
“While we understand some investor disappointment in 4Q22 results, the company continues to be aggressive in managing costs and driving revenue growth in higher margin verticals. This positions the business to demonstrate meaningful operating leverage as the operating environment improves. Our longer-term optimism is further bolstered by strong underlying trends in gaming, which we believe should continue to garner a growing percentage of advertisers’ wallet share over time.”
To response to the results and management commentary, Mr. Buck lowered his 2023 forecast with his revenue estimate sliding to $212.3-million from $268-million previously. He’s projecting an adjusted EBITDA loss of $10.5-million, however he expects positive EBITDA by the fourth quarter.
“We are also introducing our 2024 revenue and adj. EBITDA estimates of $260.7-million and $6.3-million, respectively. This represents a meaningful acceleration in revenue growth as we expect some recovery in CPMs beginning in 2H23,” he noted.
With his lower revenue expectation, Mr. Buck cut his target for Enthusiast’s U.S.-listed shares to US$3 to US$4, maintaining a “buy” rating. The average is US$3.20.
“We recommend investors take advantage of recent share weakness to accumulate a position ahead of accelerating revenue growth beginning in 2H23,” he said.
“We are now valuing EGLX shares at $3.00, reflecting an approximately 3.0 times EV/revenue multiple on our 2023 revenue estimate of $212.3-million. The $3.00 price target represents approximately 350.0-per-cent upside from recent trading levels. Our targeted 3.0 times EV/revenue multiple is a discount to high quality gaming and esports peers which currently trades at closer to 8.0 times, though we believe is skewed somewhat higher by the larger names in the sector. While EGLX shares have declined from an April 2021 high of $8.88, we believe the company continues to balance growth while also moving the business towards consistent profitability. The current environment may be challenging, but as visibility begins to improve, we believe investors should gravitate towards depressed EGLX shares.”
Elsewhere, others making changes include:
* Scotia Capital’s Kevin Krishnaratne to $3.25 from $3.75 with a “sector outperform” rating.
“Although Q4 results missed and our estimates have been reduced, this is largely due to the impact of industry-wide programmatic ad spend pressures, with the company’s higher-margin Direct Sales & Subscriptions businesses performing well,” said Mr. Krishnaratne. “We are optimistic on the potential for positive surprises as the year progresses including: 1) newly appointed CEO Nick Brien brings a wealth of industry experience and is focused on unlocking value across EGLX’s leading gaming portfolio; 2) the success of newer Direct Ad sales initiatives such as NFL TNG which is expected to be profitable in 2023, with the company receiving inbounds from other major pro sports leagues; and 3) subscriptions (less than 10 per cent of revenue, but more than 20 per cent of GP) as an area the new CEO sees considerable runway.”
* RBC Dominion Securities’ Drew McReynolds to $3 from $3.50 with an “outperform” rating.