EGLX is a somewhat risky near-term bet but represents an attractive long-term bet as a proxy for eSports growth.

As part of The Academy, I break down my thinking and experiences in Finance & Investment, Marketing, Management etc. In this series, I explain how I view stocks based on my time horizon, risk profile, and other personal criteria. Today we look at Enthusiast Gaming (TSX:EGLX). 

I would be lying if I knew how Enthusiast came on my radar, but eventually it did. As I am prone to do when I don’t know something really well, I asked my gaming editorial team. While they didn’t know the executive team, my colleagues were familiar with some of their brands and activities: 

“Enthusiast Gaming is fantastic. I've personally had great experiences with them. Extremely professional, great and passionate team of people who go above and beyond, super respected and definitely legit. Also, they were just ranked as the Fastest Growing Gaming Information Property.” Another would add: “they run EGLX out of Toronto which holds frequent eSports tournaments and Speedrunning events. As well as inviting a lot of YouTube talent to their events. They also own The Escapist which runs the popular gaming series Zero Punctuation, as well as gaming website Destructoid.”

The Escapist and Destructoid were part of Defy Media (fma Alloy Media), whom I knew pretty well. Eventually, I reached out to the executive team to explore business development opportunities (i.e. imagine us distributing our gaming programming across their websites). I understood that the company was rolling up assets in the gaming industry, with an emphasis on eSports, which is a high growth but thorny segment. The NHL’s Vancouver Canucks owners Aquilini raised money to buy Luminosity Gaming, and subsequently merged with Enthusiast Gaming.

As fans flock to eSports (partially) at the expense of traditional sports, it’s not surprising to see high net worth individuals in the sports industry backing eSports teams, but making money and creating value is elusive. Meanwhile, publishers like Activision own the rights to many games that serve as the backbone of the industry, so for outsiders to benefit therein is challenging.

As I explained in the Anti-Portfolio primer and subsequently introduction to my Portfolio:

I bought some shares [in EGLX] last year and my holding was under-water most of the year, but the underlying reasons the company and stock caught my attention remained valid… it was a matter of time before investors and the stock market caught on. For a better understanding of why I liked it (and preferably, to correct me if I am wrong) I encourage you to watch my analysis. While I am concerned about the aggressive expansion and suspect the main risk is i) dilution and ii) ongoing losses, for someone like me who has a safe portfolio, this can represent a higher-risk bet, as I view it as a good proxy to benefit from eSports.

When I try to size up an investment opportunity, I tend to think in terms of SWOT – Strength, Weakness, Opportunity, Threat.

Business SWOT

Strengths

  • Diversified revenue base: Events, Media, Subscriptions
  • Revenues promising and trending in right direction
  • Networks for reach, owned and operated brands (Destructoid and Escapist Magazine) for more engagement
  • Arguably a very good proxy to benefit from growth in gaming & eSports
  • Solid ownership base with Aqualini (owner of eSports) after merger with Luminosity Gaming
  • Enthusiast Gaming Live Expo is a strong base to grow on
  • With HQ in Toronto, benefits from lower operating expenses with lower CAD (relative to USD).

Weaknesses

  • Company’s inventory is likely heavier in text content (i.e. articles) than video, and their video inventory is mainly network (via Omnia acquisition)
  • Gross vs Net Revenues can be deceiving to some when evaluating the business (it keeps revenue on owned-and-operated media, but then must pay out a high share of revenues to network traffic)
  • Still losing money.

Opportunities

Threats

  • Covid uncertainty around events business.
  • Further dilution.
  • Business may be difficult to explain to main street.

Stock Good, Bad & Ugly

Good

  • At $300M, multiples aside given that eSports could be bigger than sports, this is a good proxy. 
  • And in the $2’s, you’re in the middle of the mid-point of 52-week range.

Bad 

  • Company remains in red, this will drag down the stock for the foreseeable future.

Ugly

  • Dilution of stock possible and losses are likely.

Bottom line: EGLX is a somewhat risky near-term bet but long term it’s an attractive proxy for eSports growth.

Disclaimer: This is not investment advice and is instead intended for informational and entertainment purposes only. As part of The Academy, I break down my thinking and experiences in Finance & Investment, Marketing, Management. In this series, I explain how I view stocks based on my time horizon, risk profile, and other personal criteria. Please consult a professional before making any investment decisions.