Maxim Group initiated coverage on GameSquare Holdings Inc (NASDAQ: NASDAQ:GAME) with a Buy rating and a price target of $3.00. The firm cited the company's compelling valuation as a key reason for the positive outlook. GameSquare's current trading at a 2025 enterprise value to revenue (EV/revenue) multiple is 0.3x, which is significantly lower compared to its peers' average of 1.9x.
The analyst from Maxim Group has based the 12-month price target on a discounted cash flow (DCF) model, which projects a calendar year 2025 EV/revenue multiple of 0.9x and a calendar year 2026 EV/earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple of 14.0x. The DCF model includes several conservative key assumptions, such as a seven-year revenue compound annual growth rate (CAGR) of approximately 15% and a long-term adjusted EBITDA margin of around 18%.
Furthermore, the price target takes into account a terminal free cash flow (FCF) multiple of 11.0x and a weighted average cost of capital (WACC) of 18.0%. Additionally, the analyst anticipates an increased share count in the future. These factors contribute to the establishment of the price target and the Buy rating.
Maxim Group's positive stance on GameSquare is reinforced by their expectation of strong growth and an expanded margin outlook. The analyst also expressed a favorable view on the company's portfolio, which includes a mix of global brands, proprietary data, technology platforms, and intellectual properties (IP).
The firm's valuation model reflects a conservative yet optimistic perspective on GameSquare's financial prospects, highlighting the potential for the company's stock to rise to the set price target based on their strategic assets and market positioning.
GameSquare Holdings has reported significant financial improvements and strategic advancements. The company has seen a 24% rise in pro forma revenue for Q2 2024, reaching $28.6 million, and a substantial improvement in profitability with a pro forma adjusted EBITDA loss of $5.4 million, a significant decrease from a $10 million loss in the same period last year.
GameSquare's subsidiary, Zoned, has announced a partnership with esports platform Clout. This collaboration, which includes a six-figure retainer deal, is intended to increase engagement within the esports community. In addition, GameSquare has extended its sponsorship agreement with Rollbit, focusing on FaZe Clan's Counter-Strike team outside the United States.
Roth/MKM has reiterated its Buy rating for GameSquare, reflecting confidence in the company's recent achievements and future prospects. GameSquare has also announced new brand partnerships worth $3 million with Topgolf, 5-hour ENERGY, and Dairy MAX, contributing to an anticipated annual revenue exceeding $100 million with a gross margin between 22.5% and 27.5%.
The company has successfully raised $36 million through non-dilutive capital, intended to support organic growth. However, the gross margin declined due to a less profitable mix of sales. The company expects the benefits of current investments to materialize in the second half of 2024 and is optimistic about the growth of the events business.
InvestingPro Insights
While Maxim Group's analysis paints an optimistic picture for GameSquare Holdings Inc (NASDAQ: GAME), recent data from InvestingPro provides a more nuanced view of the company's current financial situation. Despite the analyst's positive outlook, GameSquare faces some immediate challenges.
InvestingPro data shows that GameSquare's revenue for the last twelve months as of Q2 2024 stands at $84.16 million, with an impressive revenue growth of 175.59% over the same period. This aligns with Maxim Group's expectation of strong growth. However, the company's operating income margin is -30.61%, indicating that GameSquare is currently operating at a loss.
Two relevant InvestingPro Tips highlight potential concerns:
1. GameSquare is quickly burning through cash, which could impact its ability to fund future growth initiatives.
2. The company suffers from weak gross profit margins, with the latest data showing a gross profit margin of 20.21%.
These factors may explain why the stock is currently trading at a low revenue valuation multiple, as noted by another InvestingPro Tip. Investors should consider these insights alongside Maxim Group's analysis for a more comprehensive view of GameSquare's financial health and growth prospects.
For those seeking a deeper understanding of GameSquare's financial position, InvestingPro offers 11 additional tips that could provide valuable context for investment decisions.
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