Esports Entertainment in Survival, Not Growth Mode, Says Analyst

Time Stamp: May 24, 2022 2:11 PM

Esports Entertainment Group, Inc. (NASDAQ:GMBL), a tiny online gaming and sports betting company, is now prioritizing survival over top-line growth in a bid to bolster liquidity.

Esports Entertainment
A slide from an Esports Entertainment investor presentation. An analyst says the company is focusing on survival. (Image: Seeking Alpha)

Shares of the gaming company are down more than 15% today, extending the 12-month to about 96%, after the operator on Monday missed quarterly estimates for a second consecutive quarter while reducing its 2022 outlook.

As Roth Capital analyst Edward Engel describes the situation, Esports Entertainment is now in survival mode, and that will limit growth over the near-term.

As such, GMBL is focused on survival rather than growth, prioritizing cash flows over revenue. If management can find a way to appease creditors while rebuilding its cash balance, we believe the company can better pursue the growth stories it set out to achieve,” he writes in a note to clients today.

The analyst rates the stock “neutral,” with a price target of 45 cents, down from $1.45. The new forecast implies upside of 25% from current levels.

Esports Entertainment Stock Is a Gamble

On Monday, Esports Entertainment reported fiscal third-quarter sales that missed the consensus estimate by $7 million, while lowering full year guidance to $55 million to $60 million from $70 million to $75 million.

Underscoring the point that the stock is a gamble at this point, the company is barely more than a year removed from forecasting $100 million in 2022 revenue. With growth efforts taking a backseat, the gaming firm is now focusing on cost-cutting plans, which could bear fruit in the form of improved cash flow.

“GMBL announced a cost-cutting program that includes G&A redundancies and lower budgets for growth opportunities, such as cuts to marketing and capital intensive businesses. While the lower cost structure will limit top-line growth, GMBL accelerated expectations to generate breakeven cash flows to early FY2023 (CY2H22) vs prior guidance of FY4Q23,” adds Engel.

Murky Capital Structure

Adding to investors’ concerns about the company’s financial state, Esports Entertainment is attempting to renegotiate the terms of a convertible debt offering. That offering gives bondholders rights to convert to stock at $17.50 a share — a price the stock hasn’t traded at in over a year.

That convertible offering was worth $35 million, and while the company’s management team believes it will be successful in getting bondholders to agree to new terms, Roth’s Engel says more transparency is needed around the company’s capital structure.

“While we do see a scenario where GMBL generates positive FCF before running out of cash, the capital structure is less uncertain. GMBL’s $35M convertible notes are due June 2023, and are currently in technical default,” says Engel. “These note holders may elect to convert the notes to equity, which implies 16M shares (vs. 41M basic shares outstanding). However, these note holders are not natural holders of growth equity stocks. Rather, a better scenario for GMBL would be for these notes to be sold to strategic growth investors.”

For now, it’s unclear if those growth investors will emerge to take a gamble on Esports Entertainment stock.

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