Managed Services And Partnerships Will Drive Future Success In 2025

Key Takeaways

• Divestiture of FaZe Media reduces debt, lowers financial risk, and enhances net margins by focusing on profitable segments.
  
• Focus on managed services, SaaS expansion, and strategic partnerships aims to boost revenue, gross margins, and achieve positive cash flow.
  
• Dependence on high-profile deals poses execution risks, while competition and uncertain new market ventures could impact revenue growth and profitability targets.

Catalysts

Operates as a vertically integrated, digital media, entertainment, and technology company.

• GameSquare's divestiture of FaZe Media eliminated about $10 million of debt from their balance sheet, reducing financial risk and freeing up resources to focus on profitable segments. This is expected to improve net margins.
  
• The company plans to achieve 20-25% organic revenue growth in 2025 by capitalizing on new and existing customer relationships, cross-selling opportunities, and managed services. This indicates a significant boost to revenue.
  
• With a focus on expanding managed services and SaaS offerings, GameSquare is expected to drive higher-margin revenue streams, improving overall gross margins.
  
• GameSquare Experiences is expected to grow its revenue fivefold in 2025 by leveraging partnerships and creating immersive, brand-led experiences. This should significantly enhance revenue and contribute to net income.
  
• With strategic partnerships and a robust sales pipeline, GameSquare sees an opportunity to achieve positive EBITDA and cash flow in 2025, primarily through high-margin deals and operational efficiencies. This will positively impact earnings.

GameSquare Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming GameSquare Holdings's revenue will grow by 17.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -52.0% today to 2.9% in 3 years time.
• Analysts expect earnings to reach $4.6 million (and earnings per share of $0.13) by about May 2028, up from $-50.0 million 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 45.1x on those 2028 earnings, up from -0.6x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 16.9x.
• 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 9.46%, as per the Simply Wall St company report.

GameSquare Holdings Future Earnings Per Share Growth

Risks

• The divestiture of FaZe Media, while removing $27 million in revenue, might not be fully compensated by other segments, potentially impacting overall revenue growth targets.
  
• The reliance on high-profile deals and event-driven business, such as large contracts with Capcom and other potential seven-figure deals, introduces execution risks that could affect revenue and earnings if these deals do not close as expected.
  
• Increasing competition in the gaming and esports industry could affect GameSquare's ability to secure and expand high-margin contracts, possibly impacting net margins.
  
• There is uncertainty regarding new or younger segments like blockchain gaming and metaverse opportunities, which could pose risks if these markets do not develop as anticipated, affecting earnings from new initiatives.
  
• The company's ability to achieve positive EBITDA and cash flow in 2025 assumes successful execution and timing of several strategic initiatives; any delays or inefficiencies could delay profitability and impact net margins.

Valuation

• The analysts have a consensus price target of $3.333 for GameSquare Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $4.0, and the most bearish reporting a price target of just $3.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $157.8 million, earnings will come to $4.6 million, and it would be trading on a PE ratio of 45.1x, assuming you use a discount rate of 9.5%.
• Given the current share price of $0.75, the analyst price target of $3.33 is 77.6% 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.