Sports entertainment keeps delivering this summer.
Our men’s national team had an incredible win against Mexico last week. The game was bananas, and had just about everything: PKs, VAR, hard tackles, crazy fans, and beautiful goals.
Azerbaijan was an amazing event for Formula 1. Some quick stats - ESPN had over 950,000 viewers for the Azerbaijan GP in Baku last weekend:
Most-watched F1 contest this season
Largest US audience for Baku in history
Total F1 viewership in the US is up 36%.
I am going to write on Formula 1 ($FWONA / $LSXMA) next week. The sport is experiencing too much momentum to ignore.
The UFEA European Championship is on, and is happening between 11 June – 11 July 2021. France is looking unstoppable. England looks fantastic, but they always choke. Group F is a nightmare with Germany, France and Portugal. I think Italy is a dark-horse and has a shouting chance to make the finals.
Christian Erickson is a stud and I wish you a steady recovery.
The Tour de France is around the corner. Chris Froome is looking doubtful at recapturing his glory. I’m not sure who will win the Yellow Jersey, but Peter Sagan will win the Green Jersey and everything will be right in the world.
In other news, Dr. Dog, one of my favorite bands, just announced they are doing one last country-wide tour and then hanging it up. In remembrance of their brilliance on stage, here you go:
Dear Dr.Dog,
Rock on and thank you for the memories.
From,
A fan.
Let’s get into it for this week’s post. But first, this is what I am listening to:
Fuck me the Gorillaz’s are great.
Reminder: The Rookie wants to own businesses that 1) I like, 2) are growing, 3) generate a high amount of free cash flow, 4) have future optionality, and 5) are led by a great management team.
Step 1 and 2: Do I understand the business? Moat and Future Growth/Catalysts
Why Enthusiast Gaming? There are several reasons. I have been looking at adding ‘gaming’ exposure to my portfolio. I’ve thought about $TTWO or $ATVI or $RBLX or $U or $TCEHY or $NTDOY, but all of those are HUGE companies and I wanted something smaller in the ‘gaming’ space.
There are huge tailwinds in the video gaming industry and I want to ride that wave and hang ten baby:
$EGLX’s stock price has exploded by ~400% over the last 12 months and looks well position in the future to capture the tailwinds of the ‘gaming’ industry. Let’s jump in.
In their own words, “Through its proprietary mix of digital media and entertainment assets, Enthusiast Gaming has built a vast network of likeminded communities to deliver the ultimate fan experience. This vertically integrated media platform engages a diverse, youthful and affluent audience who are watching, reading and consuming gaming content. Over 70% of Enthusiast Gaming’s audience is comprised of Gen Zs and Millennials who rely on the Enthusiast Gaming platform to learn, engage, communicate, create, and share gaming related content.”
As of March 31 2021, the $EGLX platform engaged with approximately 300 million gaming enthusiasts worldwide monthly (aka network effects) and have grown through acquisitions of other companies (i.e. Luminosity Gaming, Omnia, and several others). I love this slide and the incredible power of their platform / network:
Here is a key section from management on how they make money and the implications of that, “A large majority of Enthusiast Gaming’s revenue is derived from the sales of ad inventory on its network of digital media properties. Enthusiast Gaming has steadily grown its network of digital media properties and has experienced a corresponding growth in revenue. Due to the steady growth, the fluctuation of spending in the advertising industry has not been obvious from Enthusiast Gaming’s operating results. Ad inventory derives its value from a number of factors, including supply and demand. In preparation for retail-oriented holidays, retail sector advertisers may increase their advertising budgets, thus reducing the availability of ad inventory and increasing its value. Similarly, advertisers in the technology industry may correlate their ad campaigns to the launch of new products.”
I’d like to know the concentration of $EGLX’s revenue and know how much of a risk this reliance on ad inventory is for their top-line growth. With that said, it does appear $EGLX has a ‘sticky’ platform as “Viewers of Enthusiast Gaming’s network of digital media properties are both men and women ages 13 to 65+ with the majority of its users spending, on average, more than 15+ hours gaming per week.”
I love this statement from their investor presentation, “We own the fan experience”. And they seem to have their fingers in just about everything.
From a high-level, here is how $EGLX explains their growth opportunities in the future:
It’s obvious that $EGLX is growing and expanding their moat. They have a strong growth trajectory and are well-position to take advantage of the ‘gaming’ momentum. $EGLX is building a fully integrated network that will be able to extract value from each area of the industry: gaming, subscriptions, ad-spend, eSports, etc. I recommend you look into their investor presentation as well.
I see a few risks: 1) the younger generation adopts and leaves platforms quickly. How long can $EGLX continue to gain ‘eye-balls’ and traffic before the 'new hot kid’ on the block comes in? 2) Can management continue to execute across all of it’s focuses? Maybe there are one too many eggs in the basket? 3) Continued growth through acquisition is costly and difficult to operationalize, and this may hamper $EGLX future prospects. 4) How much did COVID-19 accelerate growth for $EGLX and how can we normalize those numbers for the next 2-3 years? Will $EGLX basically flatline over the next 2-3 years as they essentially experienced all of this growth early due to COVID…who knows.
Verdict: Pass, I like the business, the moat and the growth prospects.
Step 3: Management
Nothing really jumps off the page with these guys - nothing great and nothing shitty. Their interviews are legit and I like what I hear. The CEO and COO have industry experience, but I don’t see a huge ‘win’ in their pasts.
Usually when looking at smaller-cap stocks, I like to see Executive Teams who have DONE IT in the past (i.e. went public, got acquired, success exit, etc) and are starting on this new venture. $EGLX’s management doesn’t seem to have that track record. They are successful, but nothing screams to me.
Their Glassdoor is poor. The CEO has a ~40% approval rating - not great. And they’ve missed on their last couple Quarterly Earnings Estimates too.
One positive is they have a good level of insider ownership. I want business partners who have ‘skin in the game’. I want their success = my success.
Verdict: Meh - some good, some questions linger.
Step 4: Valuation
High Level:
Market Cap: 879.95M
EV: 873.82M
EV / Revenue (NTM): 5.50x
Revenue: 95.85M
FCF: -7.17M
Quarterly Revenue Growth (yoy): 320.80%
GM Profit: ~25%
Current Ratio: 1.98x
This is tough. At a quick glance $EGLX looks relatively cheap compared to their growth prospects and future. At 7.33x Price / Sales for a company growing +300% revenue, it’s current valuation is reasonable. They have a strong balance sheet with plenty of cash, a little debt, and will hopefully be free cash flow positive in the next few quarters.
I think doing a DCF for $EGLX doesn’t make sense. But I think the key thing here is to watch how management executes against estimations, their growth plan, and manages the risks mentioned earlier in the post.
Verdict: Pass - it’s reasonable with a hint of ‘spicy-ness’ mixed in
The Rookie Quick Fire Challenge - LINK HERE
Score: 38 / 81
Overall Verdict: I like the business and it’s worth watching and letting time answer a few questions: Does it have pricing power? Is it a true network? Are there high switching costs for it’s users to migrate to another platform? Does revenue concentration become worse or improve?