Costs Are Exploding, Revenue Growth Looks Hard To Maintain

We are selling our position in Enthusiast Gaming Holdings Inc (EGLX). The company reported sales of CAD$ 30.0m, generating a gross profit of CAD$ 5.9m. Operating expenses reached CAD$ 18.7m and translated into a net loss of CAD$ 13.5m.

  • The company now boasts a revenue growth of more than 300%. Investors should note that this includes its acquisitions

A Closer Look

Why are we selling? Here are the metrics from the previous quarters:

  • Pro forma (including the Omnia Media acquisition) revenue was $ 31.7m for Q3 2020, an increase of 17% compared to $ 27.2m in Q2
  • Gross margin decreased to 24.9% in Q3 2020 from 65.1% in Q3 2019

The quarter-on-quarter figures show that Enthusiast Gaming is having issues with its growth, which may compromise its valuation going forward. Certainly if gross margins continue their descent:

  • In Q4 of 2020, it reported a gross profit of $ 6.2m (these are U.S. Dollars) at a gross margin of 19.1%
  • In Q1 of 2021, it reports a gross profit of CAD$ 5.9m (or around $ 4.7 to 4.8m U.S. Dollars at a rate of 1/1.25) at a gross margin of 19.6%

This shows that the company is under pressure to grow its sales quarter-on-quarter and may be forced to complete further acquisitions in order to maintain its growth levels. This may require it to raise additional capital as it is not yet profitable.


BENCHMARK'S TAKE

  • Enthusiast Gaming aims to transform social gaming by turning itself into the leading media company in e-sports
  • Growth is mainly fuelled by acquisitions and enable it to present triple-digits growth numbers
  • However, quarter-on-quarter sales growth tell a different picture while the company fails to grow its gross margins
  • Enthusiast Gaming’s growth-through acquisition model may require it raise more capital in the coming months

We have sold our position in Enthusiast Gaming and retain the proceeds in cash.


Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Disclosures

The author has no business relationship with any company mentioned in this article and the author is not receiving any form of compensation for this article other than contributions from paying subscribers.

Credits

Photo by Igor Karimov on Unsplash.