Crypto Treasury Risks And Creator Volatility Will Eventually Support A Stronger Platform

Catalysts

About GameSquare Holdings

GameSquare Holdings operates a gaming focused media, creator and Esports platform combined with a digital asset treasury that generates yield from Ethereum and related Web3 activities.

What are the underlying business or industry changes driving this perspective?

• GameSquare now runs a more focused platform across agency, media technology and Esports, with Q3 gross margin at 49.4% and a 20 percentage point sequential margin improvement. However, the heavier exposure to project based brand work and live activations could limit visibility if campaign budgets weaken, which would mainly pressure revenue resilience and adjusted EBITDA.
• The Click Management acquisition brings one of the largest English speaking gaming talent rosters and US$12.4 million of 2024 revenue with US$1.2 million of expected annualized pro forma EBITDA. Creator earnings are tightly linked to advertiser demand and platform algorithm changes, so any slowdown in creator led brand deals could restrict the uplift to group revenue and net margins.
• The company has built an end to end offering around data and analytics via Stream Hatchet and consolidated Sideqik to cut about US$1.25 million in annual operating expenses. The need to keep investing in analytics and CRM capabilities as audience behavior evolves may offset some of these savings, limiting the flow through to operating margin and earnings.
• The digital asset treasury strategy generated about US$600,000 of yield in two months and the company held 15,618 ETH with a US$55.5 million cost basis and a US$9.3 million unrealized gain in Q3. Sustained volatility in Ethereum and Altcoins such as Anime and Rekt coin could introduce earnings swings that complicate forecasting for net income and equity value.
• The Ethereum based yield program and eight crypto funds with a US$6.9 million value are intended to fund buybacks, capital returns and reinvestment. Future regulatory shifts around crypto markets or DeFi platforms could constrain onchain deployment options, which would directly affect yield driven revenue, treasury income and the company’s ability to support repurchases from internally generated cash flow.

Assumptions

This narrative explores a more pessimistic perspective on GameSquare Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming GameSquare Holdings's revenue will decrease by 15.2% annually over the next 3 years.
• The bearish analysts are not forecasting that GameSquare Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate GameSquare Holdings's profit margin will increase from -35.9% to the average US Interactive Media and Services industry of 8.5% in 3 years.
• If GameSquare Holdings's profit margin were to converge on the industry average, you could expect earnings to reach $5.4 million (and earnings per share of $0.04) by about March 2029, up from -$36.9 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 43.0x on those 2029 earnings, up from -0.8x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 15.3x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.4%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A large portion of the recent improvement in net income and margins comes from the Ethereum based digital asset treasury and related yield. A prolonged downturn or higher volatility in crypto markets could reduce treasury income and reintroduce earnings swings, which would weigh on net income and potentially compress equity value.
• The company is leaning into creator led brand work, live activations and agency services. These areas are closely tied to advertising budgets and RFP volumes, so a weaker long term ad spending cycle in gaming and Esports could limit the expected uplift from Click Management and publisher contracts, putting pressure on revenue and operating margins.
• GameSquare expects meaningful synergies from integrating Click, consolidating Sideqik into Stream Hatchet and simplifying the platform. Integration risk across multiple acquired and divested units could lead to higher than planned operating expenses, slower synergy realization and a drag on EBITDA and cash generation.
• The Ethereum yield strategy, crypto funds and Altcoin holdings such as Anime and Rekt coin introduce regulatory and counterparty risk over time. Tighter DeFi or securities regulation, or issues at partners like Dialectic, could constrain onchain deployment, reduce yield and weaken the company’s ability to fund buybacks and reinvestment from treasury income.
• The business model now blends a media and Esports platform with an onchain treasury that targets above market yields. If investors apply a lower long term valuation multiple to crypto exposed companies or question the durability of these yields, the share price could lag operating progress, even if revenue and adjusted EBITDA follow management’s internal targets.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for GameSquare Holdings is $1.5, which represents up to two standard deviations below the consensus price target of $2.25. This valuation is based on what can be assumed as the expectations of GameSquare Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $3.0, and the most bearish reporting a price target of just $1.5.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $62.8 million, earnings will come to $5.4 million, and it would be trading on a PE ratio of 43.0x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $0.31, the analyst price target of $1.5 is 79.0% 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.