Roth MKM analysts Sean McGowan and Qudrat Qureshi, in a research report published on October 18, 2024, maintained a Buy rating on GameSquare Holdings Inc. (GAME:NASDAQ; GAME:TSX) with a price target of US$5.00. The report follows GameSquare's pre-announcement of its Q3 2024 results, which showed better-than-expected revenue and a lower adjusted EBITDA loss.
McGowan and Qureshi highlighted the company's performance, stating, "GAME said revenues were US$26.5M vs. US$11.5M in 3Q'23. Our estimate was US$24.0M. The company expects revenues [to grow] 130% vs. our estimate of a 109% growth." They added, "Management has updated its revenue guidance from +US$100M previously to a range of US$105M to US$110M."
The analysts noted the impact on gross margins, commenting, "GAME said gross margin was 18% vs. 21.8% in 3Q'23. Our estimate was 29%. GM came in ~400 bps lower than last year, driven by a greater mix of revenue coming from lower margin ad revenue."
Regarding operational expenses, the analysts stated, "We estimate opex were US$9.9M vs. US$8.0M in 3Q'23. Our prior estimate was US$10.9M. We estimate that opex as a % of revenue improved by 32%, as part of management's ongoing efforts to reduce costs."
The report highlighted the improvement in EBITDA, noting, "GAME said EBITDA was a US$2.4M loss vs. US$3.7M loss in 3Q'23. Our estimate was US$2.6M loss. GAME delivered a more significant AEBITDA improvement than anticipated."
Roth MKM's valuation methodology for GameSquare is based on a forward revenue multiple. The analysts explained, "Our PT implies an EV/Rev multiple of 1.5x our revenue estimate of US$139M for 12 months ending Sept '26." They added, "We believe a group of marketing technology/service companies might be considered comparable trades at a median EV/Revenue multiple of 1.8x 2024 revenue estimates (average multiple of 5.2x) and 1.6x 2025 revenue estimates (average multiple of 4.5x)."
The analysts also outlined several risk factors, including failure to realize anticipated cost synergies, integration challenges with the FaZe Clan acquisition, general market conditions for ad spending, and potential loss of key influencer relationships.
In conclusion, Roth MKM's maintenance of a Buy rating and US$5 price target reflects a positive outlook on GameSquare Holdings' growth potential in the digital media and esports market. The share price at the time of the report of US$0.90 represents a potential return of approximately 456% to the analysts' target price, highlighting the significant upside potential if the company continues to execute its growth strategy successfully.
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Disclosures for Roth MKM, GameSquare Holdings Inc., October 18, 2024
Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Disclosures: Shares of GameSquare Holdings, Inc. may be subject to the Securities and Exchange Commission's Penny Stock Rules, which may set forth sales practice requirements for certain low-priced securities.
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