RuPaul's Drag Race Games And Subscriptions Will Unlock Future Potential

Key Takeaways

• New revenue streams and strategic game launches leveraging strong IPs are set to enhance revenue and overall earnings.
  
• Expanding to new platforms and focusing on quality game releases aim to optimize margins and boost profitability.
  
• Reliance on new game launches and partnerships poses risks to revenue, with competition and share buybacks potentially affecting market share, profit margins, and growth.

Catalysts

Through its subsidiaries, develops, operates, and publishes free-to-play casual mobile games in Canada, the United States, Europe, and internationally.

• The introduction of new revenue streams through subscriptions, season passes, and new advertising placements is expected to diversify and increase East Side Games' revenue, enhancing its top-line growth.
  
• The launch of new games, such as RuPaul's Drag Race: Match Queen and Squishmallows Match, supported by strong IPs and showcasing robust early monetization and engagement metrics, is anticipated to drive significant revenue increases and boost overall earnings.
  
• The strategic shift to focus on quality over quantity in game releases, with prioritized launches for titles with the highest potential, suggests a pathway to improved net margins by optimizing development resources and maximizing game profitability.
  
• Expanding onto new platforms, like the Epic Mobile Store, with a lower platform fee of 12%, offers a potential for improved project margins and overall earnings by reducing distribution costs compared to other platforms.
  
• Continuation and expansion of successful crossover events, leveraging popular IPs, are likely to increase player engagement and ARPDAU, thereby strengthening revenue growth and improving net margins through increased user activity and spending.

East Side Games Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming East Side Games Group's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.1% today to 11.9% in 3 years time.
• Analysts expect earnings to reach CA$13.3 million (and earnings per share of CA$0.16) by about April 2028, up from CA$-925.2 thousand today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.2x on those 2028 earnings, up from -32.0x today. This future PE is lower than the current PE for the CA Entertainment industry at 16.6x.
• Analysts expect the number of shares outstanding to decline by 3.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

East Side Games Group Future Earnings Per Share Growth

Risks

• The company’s reliance on new game launches and IPs such as RuPaul's Drag Race: Match Queen and Squishmallows Match could pose a risk if these titles do not achieve expected engagement and monetization, impacting future revenue growth.
  
• Increased competition in the gaming industry, particularly in the Match-3 genre, could affect East Side Games Group’s ability to capture market share and could lead to decreased revenue and profitability.
  
• The company’s operating model relies on a lean core team supplemented by global development partners, which could expose ESG to operational risks such as quality control and coordination challenges, potentially affecting their profit margins.
  
• Although the company aims to diversify revenue through new streams like subscriptions and season passes, there is a risk that these initiatives may not be as successful as anticipated, which could put pressure on net margins and earnings.
  
• The company’s financial strategy involves significant share buybacks, which may limit cash flexibility or affect capital allocation for organic or acquisitive growth, impacting its long-term financial stability and profitability.

Valuation

• The analysts have a consensus price target of CA$1.25 for East Side Games Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$112.1 million, earnings will come to CA$13.3 million, and it would be trading on a PE ratio of 8.2x, assuming you use a discount rate of 7.7%.
• Given the current share price of CA$0.38, the analyst price target of CA$1.25 is 69.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.