Enthusiast Gaming (OTCQB:ENGMF) is a company focused on the fast-growing entertainment industry associated with video games. The company hopes to ride this trend through three of its divisions, namely: Media, Events and Esports.
There are currently 2.7 billion gamers who will spend $159.3 billion on games in 2020. This figure is expected to surpass $200 billion by 2023. I believe Enthusiast Gaming is one of the best ways to take advantage of the promising entertainment and Esports opportunity that is arising due to the growing interest in video games.
Source: Enthusiast Gaming Investor Presentation
So, what does Enthusiast Gaming currently own?
Currently, the company owns over 100 websites focusing on unique gaming content, YouTube channels with a combined 24 million+ subscribers, professional Esports teams such as Luminosity Gaming, influencers across many different social media platforms, and it was responsible for hosting live Esports events pre-COVID 19. Taken together, its platforms reach an audience of over 300 million gamers on a monthly basis. For those who know the industry, some of these influencers, YouTubers and Esports “athletes” the company works with or owns are superstars, on their way to being on par with athletes such as Lebron James in terms of reach, fan base and influence.
Source: Enthusiast Gaming Investor Presentation
Summary
To provide a little more insight on the demographics of Enthusiast Gaming’s user base, I will provide some figures provided by company CEO Adrian Montgomery on the latest Q3 2020 conference call. 65 million of the 300 million monthly users are located in the U.S. alone. This is important because when it comes to eventual monetization, U.S. “eyes” are traditionally those that have the highest value. To illustrate how valuable U.S. visitors are, I will use Facebook’s ARPU (Average Revenue per User) as an example. The ARPU for an American and Canadian in Q3 2020 was $39.63, while that of the rest of the world was only $7.89. The next highest ARPU was in Europe, at $12.41 in Q3 2020.
Furthermore, half of every American male between the age of 18 and 34 visited at least one of the platforms owned by EG. This is an important demographic, since it is one of the hardest-to-reach ones, and is one the demographics that spends the most on non-essential goods and has a larger lifetime value, since they are in the early stages of their lives. Montgomery mentions how 70% of the company’s audience is either Gen Z or Millennials, with 65% of its audience spending more than 15 hours a week gaming. 67% of its platform users purchase more than 7 video games every year. Referring back to the importance of this demographic because it is hard to reach; an astounding 48% of EG’s audience do not use Facebook. Altogether, the company has amassed an audience with significant potential for monetization if it is able to execute on its strategies over the coming years.
Monetization is now beginning to be Enthusiast Gaming’s main focus. On the company’s investor presentation, it provides a 3-year growth strategy in which it is currently focused on continuing to build scale, and is now beginning to try monetizing on its MAUs through advertisement. The company’s pro forma ARPU is $0.40, with a forecasted $3.00 ARPU by 2023.
Source: Enthusiast Gaming Investor Presentation
ARPU is one of the most important metrics to keep an eye on, as it is one of the largest determinants on the value of the company. In previous presentations, management has compared the current valuation to those of more prominent social media platforms in order to demonstrate their relative undervaluation. I am in slight disagreement with this comparison. It is difficult to compare EG’s monthly active users (MAUs) to those of larger platforms such as Twitch (AMZN), Twitter (TWTR), Facebook (FB), etc. The reason for this being that larger platforms have all their visitors on one platform, which takes advantage of the network effects associated with that. In contrast, if Enthusiast Gaming has millions of MAUs over dozens or hundreds of platforms, it is difficult to tell which platforms are valuable and which aren’t. Furthermore, ARPUs will likely be higher when all the users are on one platform, since that likely increases engagement and lowers churn. However, the CEO has mentioned how the recent acquisition of Omnia has provided EG with great video inventory assets in high demand from large companies such as Gillette, with these assets currently generating high CPMs. Nevertheless, EG is in the early stages of its monetization phase, and current or prospective investors should keep a close eye on some of the metrics I’ve listed above.
Q3 2020 Results
Moving onto the most recent financial report highlights, the company has reported $31.7 million in pro forma Q3 2020 revenue. It expects Q4 2020 revenue to be about 20% higher, with 2021 revenue also being 20% higher than that of 2020. It is important to note that if EG is successful in monetizing its user base, the company will enjoy gross margins above 50% and have the advantage of low or no user acquisition costs, as it has acquired new users organically. This would make successful monetization and user growth highly lucrative, as most of it flows directly to the bottom line.
Valuation
When it comes to valuation, it is extremely tricky to determine for EG due to its size and the fact that it is currently not profitable. I began my position in the company when its market cap was about C$150 million, a couple of weeks ago, with it now trading at C$300 million. Does the fact that the stock doubled in such a short time frame make it unattractive? Was C$150 million a fair price and is C$300 million now overvalued? To be honest, I have no idea what the current fair value of EG is.
My thought process when I initiated my position was that this was one of the few ways, while also what I determined to be the best way, for a retail investor to have access to the upside in the fast-growing video game industry, especially Esports. I did not purchase this to double my money. To me, this is a speculative investment that could work out fantastically, with outstanding long-term returns (10x or greater over a decade), or terribly, where I can lose all or most of my money. In my view, purchasing Enthusiast Gaming stock is essentially like purchasing an option, in betting that the company will be capable of successfully monetizing and taking advantage of such a lucrative opportunity in the gaming industry.
What increased my conviction in EG’s prospects was management’s track record of success and a large insider ownership of 30%, with open market insider buys at around the level I purchased it at (C$1.50 per share). A good portion of this ownership belongs to the Aquilini Investment Group, owner of the Vancouver Canucks hockey team and the Rogers arena. CEO Adrian Montgomery was the Alternate Governor for the Canucks. Insiders and management therefore consist of a healthy mixture of gaming enthusiasts, with Menashe Kestenbaum, the founder, and individuals who have previously worked in sports entertainment and media, an industry that shares similarities with what EG is trying to accomplish.
Conclusion
In essence, I think Enthusiast Gaming is one of the best ways to get exposure to the burgeoning video game and Esports sector. Investors should keep an eye on user growth and ARPUs in determining what value they’d like to assign to the company. So far, the company has impressed enough for me to have initiated a position. I believe it has the possibility to be a wildly rewarding position, should the company be successful in executing its monetization and user growth strategies, and should be considered by investors who would like to have speculative exposure to a lucrative, fast-growing industry.
Disclosure: I am/we are long ENGMF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.