Esports Entertainment Plunges, Analyst Questions Liquidity

Posted on: February 25, 2022, 02:12h. 

Last updated on: February 25, 2022, 03:16h.

Esports Entertainment Group (NASDAQ:GMBL) shed nearly two-thirds of its value this week. That’s after the company missed fourth-quarter estimates and cut 2022 guidance, prompting an analyst to question the firm’s liquidity position.

Esports Entertainment Group
Esports Entertainment Group highlighted in an online profile. An analyst is concerned about the company’s liquidity. (Image: YouTube)

Earlier this week, the Malta-based gaming and sports betting company said its fourth-quarter sales missed Wall Street forecasts by 22%, and it slashed its 2022 revenue guidance by 25% to 30%. After the stock tumbled 8.62% on Tuesday, it plunged 58.25% on Wednesday. The shares slid another 5.65% on volume that was more than double the daily average. Additionally, Esports Entertainment’s cash position is increasingly precarious.

With minimal cash ($1M at Dec’ 31), GMBL is relying on its ATM to fund monthly cash burn of ~$1.3M, where $16M remained on the ATM as of Feb. 18,” said Roth Capital analyst Edward Engel in a note to clients.

Engel starts coverage of Esports Entertainment with a “neutral” rating and a $1.40 price target. That implies upside of 20.6% from the Feb. 25 close. Over the past year, the stock plunged 93.3%.

Esports Entertainment Capital Structure Questions

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 since last April.

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.

“Limited transparency in GMBL’s eventual cap structure makes it difficult to properly value shares, and we believe only special situation investors should consider investing,” said the analyst. “If taken at face value, GMBL’s implied 0.9x EV to FY22 sales is extremely cheap. But we have little conviction in GMBL’s eventual cap structure within ~6 months.”

Engel also criticized the operator for lack of transparency regarding its Netherlands exposure, noting rivals made clear to investors they were departing that market.

“We believe mgmt should have disclosed its Netherlands exposure and updated guidance earlier, where peer such as Entain, 888 and Kindred disclosed exiting the market on Oct. 1,” noted Engel.

Bull Case…Sort Of

Esports Entertainment is in the process of soft launching its technology for esports wagering in New Jersey. Should that effort bear fruit, it’s an obvious catalyst for the downtrodden stock.

Wagering on competitive computer gaming is viewed as a future growth driver for the US sports betting industry. But it’s one that hasn’t been tapped into in a significant fashion yet. Still, there are a lot of moving parts to a bullish thesis for this stock.

“While we remain positive on GMBL’s long-term opportunities, particularly within eSports wagering, a combination of liquidity concerns and reduced transparency limits our conviction. We acknowledge a bullish scenario where GMBL exceeds its latest guidance, shores up liquidity, repairs investor confidence, and erases recent share price declines,” concludes Engel.