Tuesday, February 14, 2022

Michael Kupinski, Director of Research, Noble Capital Markets, Inc.

Patrick McCann, Research Associate, Noble Capital Markets, Inc.

Jacob Mutchler, Research Associate, Noble Capital Markets, Inc.

Refer to the bottom of the report for important disclosures

Overview: Entertainment and Leisure stocks have had a good start to the New Year, but the better performance has not erased the disaster that was 2022. We believe that stocks appear to be baking in a mild economic downturn, a soft landing, so to speak. Given that we are skeptic of the conventional thought, we take a cautious stance regarding the recent lift in valuations and encourage investors to take an accumulation approach.

Entertainment:Bowlero on a roll. The Noble Entertainment Index performed well, up 1.5% in the last 12 months, compared with negative returns for the S&P 500 (-7.1%). Although there were broad economic challenges over the past year, entertainment companies benefited from the general public’s return to “normal” following the COVID pandemic. We believe that in-person experiential entertainment recovery is still in its early stage and should continue into 2024.

Gaming: Looking for value in the rubble. The Noble Gaming Index is down 53.1% in the past year, well below the S&P 500, down 7.1%. But, recently, the Noble Gaming Index increased 12.9% in the last quarter, outperforming the 3.2% increase in the general market, as measured by the S&P 500 Index. A reflex bounce? Short squeeze? Or, were the shares oversold? We encourage investors to play it safe.

Esports: Motorsport Games revs its engine. The company was full steam ahead in investing in its new product launches in 2023, but it was running out of cash. Fortunately, a couple of favorable moves to add liquidity set the stock soaring, up 1,600% in one day, creating further opportunities to raise cash. Now, flush with cash, investors look toward the product rollouts.

Leisure: Travel to new heights. The U.S. Travel Association updated its 2023 outlook, projecting a resilient domestic leisure travel market. Consumers appear eager to splurge on travel, in spite of the economic headwinds. We focus on one of our favorite internet media plays, Travelzoo. The company recently updated Fourth Quarter 2022 guidance with revenues expected to be roughly $18.5 million, a strong 31% increase year over year.

Overview

Have economic prospects improved?

The Entertainment & Leisure industries performed better since the beginning of the year, providing some relief to the downturn that investors suffered in 2022. As Figure #1 Entertainment 12 Month Trailing Stock Performance highlights, the Entertainment and Leisure Indices are still recovering and many have yet to offset the 2022 declines, except for the Entertainment stocks. The Entertainment stocks not only have performed well in the first quarter, but have beat the general market as measured by the S&P 500 Index over the past year. The Noble Entertainment Index is up a modest 1.5% in the past year, better than the general market’s 7.1% decline. It is important to note that the Noble Indices are market cap weighted. As such, not all stocks reflected the favorable relative performance. 

What is driving the improved stock performance in the latest quarter? We believe that investors have become more positive about the economic outlook, with conventional wisdom now anticipating a soft economic landing or a mild economic recession. This is a shift toward an optimistic tone from one that anticipated a severe economic recession. The Federal Reserve caused the dire outlook. The Fed signaled that it will continue to raise interest rates until inflation is arrested, in spite of the adverse impact on the economy and jobs. But, since then, conventional wisdom on the economy has brightened as inflation seems to have subsided. The more favorable economic outlook is exemplified by a Wall Street firm that decreased the risk of an economic recession in 2023 by a sizable 25%.

We tend to be skeptics and conservative. As such, we tend not to buy into strength. Our view is that the stocks were oversold and reflected recessionary type valuations. But, have the economic prospects really improved that much? We encourage investors to take an accumulation approach, focusing on some of our favorite stocks highlighted in this report, including Bowlero, Codere Online Luxembourg, Engine Gaming and Media, and Travelzoo. 

Figure #1 Entertainment 12 Month Trailing Stock Performance

Source: Capital IQ

Entertainment

Bowlero on a roll

The Noble Entertainment Index performed well, up 1.5% in the last 12 months, compared with negative returns for the S&P 500 down 7.1%. Although there were broad economic challenges over the past year, entertainment companies benefited from the general public’s return to “normal” following the COVID pandemic. We believe that the trend toward social gathering and in-person activities are helping to offset broader macroeconomic headwinds. While some industries received a boost during late 2020 and 2021 when consumers were spending stimulus checks on online shopping, the recovery for in-person entertainment has been more recent. In our view, the recovery in experiential, in-person entertainment appears to be gaining traction and the recovery could continue into 2024.

As Figure #2 Entertainment Revenue Growth illustrates, virtually all of the experiential entertainment companies reported strong revenue growth in the latest reported quarter, (the calendar third quarter end September 2022). One of the examples of the in-person recovery is in bowling centers, in general, and Bowlero, specifically. The company recently announced that it eclipsed $1 billion in Trailing Twelve Month (TTM) revenue as of December 31, 2022, which included 48% same store sales growth over the prior year. Additionally, Bowlero added 40 bowling centers over the past 18 months as it continues to successfully execute on its roll-up strategy. As revenues have improved, so too have margins. As Figure #3 Entertainment EBITDA Marginsillustrates, Bowlero delivered industry leading margins in the latest reported quarter at 24.8%.

Bowlero is on a roll. With the BOWL shares up roughly 50% in the past 12 months, the shares have outperformed both the Noble Entertainment Index up 1.5%, as well as the broader market, as measured by the S&P 500, which decreased -7.1%. In spite of the favorable fundamental tailwind, the shares trade in line with its experiential entertainment peers. Figure #4 Entertainment Comparables illustrates that the BOWL shares trade at 9.7 times Enterprise Value to our estimated 2023 adj. EBITDA, below the peer average of 10.7 times, despite the company’s industry leading fundamentals. Given its favorable fundamental outlook, prospects for enhanced revenue and cash flow growth through acquisitions and favorable internal growth, and compelling stock valuation, the BOWL shares lead our list for favorites in the Entertainment industry. 

Figure #2 Entertainment Revenue Growth 

Source: Company 10Qs 

Figure #3 Entertainment EBITDA Margins 

Source: Company 10Qs

Figure #4 Entertainment Comparables 

Source: Company filings and Noble estimates 

Gaming

Looking for value in the rubble

The Noble Gaming Index is down 53.1% in the past year, well below the S&P 500, down 7.1%. In our view, the poor performance of Gaming stocks was the result of investors trying to take risk off the table. Many Gaming companies are still in developmental stages, with high marketing and customer acquisition costs. As such, many in the industry are unprofitable and rely on the balance sheets to fund operations. Before Covid, these companies benefited from the easy money policies and favorable capital markets, which many relied on for funding. But, with the recent sharp rise in interest rates and difficult general market conditions to raise capital, the music has stopped. Gaming stock valuations are now more scrutinized, in an environment of increasing cost of capital. As such, we believe industry players that are already profitable, and those with little to no debt and ample cash on the balance sheet are best positioned for to lead the industry.

Our focus is on the shares of Codere Online Luxembourg, CDRO. The CDRO shares are down 42.4% in the last year, underperforming the S&P 500’s -7.1% return. However, despite a tough 12-month period, the CDRO shares outperformed the Noble Gaming Index, which dropped 53.1%. We believe that the relative outperformance of the CDRO shares over the past year reflects its better financial position than most of its peers. Most recently, the Noble Gaming Index improved, as illustrated in Figure #5 Three Month Stock Performance. The Noble Gaming Index increased 12.9%, outperforming the 3.2% increase in the general market, as measured by the S&P 500 Index. A reflex bounce? Short squeeze? Or, were the shares oversold? It appears to be all the above for many of the stocks in the index. The largest gains were from companies that appeared to be struggling and had favorable news. We believe that investing in struggling companies with limited access to capital is a dangerous place to be.

In terms of Codere Online Luxembourg, the fundamentals of the company appear favorable. Codere Online’s cash burn has been within expectations and the company had a strong cash balance of  €72 million and virtually no long-term debt as of September 30, 2022. As such, the company appears positioned to continue executing its growth strategy in Latin America, which for the time being consists of broadening its presence in key markets such as Mexico and Columbia, and aggressively expanding in Argentina. 

The company’s growth could be bolstered if Brazil begins regulating sports betting in 2023. Importantly, Entain CEO Jette Nygaard-Anderson, recently stated that she expects Brazil to complete process of regulating sports betting in 2023, citing new administration of President Lula. In summary, Codere Online is distinguished from many of its peers, with an established foothold in key Latin American markets, flush with cash to penetrate existing markets and enter new ones. It has the ability to become the industry leader in many of its markets. 

Near current levels, the iGaming industry peer group is trading at 5.0 times Enterprise Value to 2023 revenues, illustrated in Figure #6 Gaming Comparables. Codere Online Luxemburg (CDRO) is one of our favorite plays in the iGaming industry due to several factors. As mentioned above, the company has virtually no long-term debt and €72 million in cash, as of September 30, 2022. We believe that the company has a favorable runway to reach cash flow breakeven while continuing to fund its expansion in the meantime. Furthermore, in our view, given its ability to invest in its developing markets, the company appears to have the ability to become the preeminent online gambling leader in many Latin American markets. Finally, the CDRO shares appear compelling, trading near 2.6 times expected 2023 revenue, well below peers. As a result, we view the CDRO shares as among our favorite online gambling plays, with the shares rated Outperform with $9 price target.   

Figure #5 Three Month Stock Performance

Source: Capital IQ

Figure #6 Gaming Comparables 

Source: Company filings and Noble estimates 

Esports

Motorsport revs its engine

The Noble Esports Index was down 53% over the past year, underperforming the broader market, which was down 7%, as as measured by the S&P 500 Index. Not unlike many other emerging industries, Esports has been battered by macroeconomic headwinds over the past year. Investors are placing more importance on companies that are generating positive cash flow, rather than speculating on future profitability, given recessionary concerns and elevated interest rates. While the Esports industry has shown favorable trends in the number of viewers and hours watched, many companies are still burning cash and may need to raise additional capital. Total hours watched of esports content was up 40% in Q3 of 2022, illustrated in Figure #7 Esports Viewership. 

The best performing stock in the Esports index was HUYA, which only declined by 9.7% on a TTM basis. Huya is the largest Esports live streaming platform in China and recently expanded into a variety of real-time events. Huya benefits from the favorable growth trends of the Esports and live streaming industries, as it does not rely on the popularity of a single game or tournament. The worst performing stock in the Esports index is Esports Entertainment Group (GMBL), which declined 97.2% on a TTM basis. The company burned through its cash and had limited access to additional capital.

In the latest quarter, however, the Noble Esports Index rebounded, up a strong 47.9%, as depicted in the earlier in Figure #5 Three Month Stock Performance. The strength in the quarter was due to a relatively few number of stocks, including HUYA (up 135.8%) and two of our favorite plays, Motorsport Games (MSGM) and Engine Gaming and Media (GAME), which increased 68.9% and 149.8%, respectively. In fact, Motorsport Games increased a stunning 1,618.8% with a trading day following news of a debt for equity swap. 

Motorsport Games revs its engine 

Motorsport Games is a publisher of motorsport video games, with the rights to iconic racing franchises such as NASCAR and 24 Hour of LeMans. The company recently completed a debt for equity swap which led to a surprisingly strong increase in the stock valuation. This allowed the company to complete several direct offerings, eliminating all company debt and raising over $11 million in cash. The capital raise alleviated liquidity concerns, allowing the company to continue developing games. In our view, the launch of several games in 2023 should allow the company to swing toward cash flow break even. We have moved our rating to Market Perform given that the shares blew through our $9 price target. Our rating is under review as the company updates investors on its product rollout roadmap and the level of cash burn until it launches its upcoming products. 

Engine Gaming & Media 

Another one of our favorites is Engine Gaming & Media (GAME). Engine Gaming & Media is a multi-platform media company engaged in most aspects of the Esports industry. The company’s media division coordinates video access and advertising, data analytics, and connects advertisers to social influencers in the gaming industry. Figure #7 Esports Viewership and Figure #8 Esports Live Streaming are from Stream Hatchet, the company’s live streaming data and Esports analytics business.

The company reported its fiscal first quarter results on January 17, 2023, which beat our expectations. Notably, the company’s influencer and gaming analytics software as a service revenue, a key growth vehicle, grew revenue by a strong 34.6% on a year over year basis. In addition, the company plans to merge with GameSquare Esports, which it expects will provide scale and provide cost synergies. Management indicated that the combination should accelerate the new company’s path toward profitability. We plan to update our models as more details emerge regarding the upcoming merger. 

Figure #9 Esports Comparables highlight the stock valuations in the Esports industry. The valuations of many of the stocks, including Motorsport Games and Engine Gaming and Media are in flux. As mentioned, Motorsport Games significantly improved its financial position with recent equity raises and debt for equity swaps. Engine Gaming and Media’s fundamentals likely will change with a planned merger. In our view, the latest quarter has been a watershed moment for these companies. We look forward toward reevaluating our models, ratings and price targets upon more details on the developments from the respective companies. 

Figure #7 Esports Viewership 

Source: Stream Hatchet

Figure #8 Esports Live Streaming 

Source: Stream Hatchet

Figure #9 Esports Comparables

Source: Company filings and Noble estimates

Leisure

Travel to new heights

Once again, we focus on the travel industry in our Leisure section due to some favorable developments and outlook. Notably, the U.S. Travel Foundation forecasts an increase in travel spending in 2023 above both 2022 and 2019 levels. This would indicate that the travel industry has fully recovered from the depressed Covid impacted levels. Airline flights are full and there is high demand for hotels, even though pricing for those rooms are significantly higher. What is driving the demand and will it continue?

For the U.S., there are three factors influencing the relatively favorable outlook for the U.S. travel industry. The domestic leisure travel has been resilient in spite of higher gas prices, hotel rooms and airline tickets. A recent article from Forbes suggests that U.S. leisure travel is rebounding despite inflation as it is one area where people are willing to splurge. A second contributing factor to the favorable outlook is Business travel. Business travel is expected to be somewhat weaker in 2023 given the prospect of a mild economic recession in 2023. But, the business travel outlook is improved as a severe economic downturn appears less likely. The weak area has been international inbound travel to the U.S. We believe that this is a function of the strong U.S. dollar relative to other major currencies. On the flip side, international travel from the U.S. appears to be favorable given the U.S. dollar strength. 

We believe that the inflationary trends, higher airline fares and hotel rates, as well as sluggish international travel, all have prompted travelers to seek travel deals. Consequently, one of our favorite plays on the travel industry, Travelzoo, has seen fundamental improvement. As an internet media company, its business is derived from its advertisers and travel partners to offer travel deals to its customers. This is different from travel suppliers and online travel agencies that rely on travel demand. Notably, Travelzoo recently updated its fourth quarter revenue guidance to be roughly $18.5 million, an increase of a strong 31% year over year, in line with our forecast.

Travelzoo is one of our favorite plays for the recovering travel industry. The shares are down roughly 46% in the past year, which we believe could present an attractive entry point for investors. Since reaching lows in December near $4.11 per share, the TZOO shares have rallied, up roughly 25% since that time. In our view, the shares may have reacted to a recent merger involving its founder, Ralph Bartel. The merger brought with it an influx of cash, but increased Mr. Bartels ownership of the company from slightly over 50% to over 60%. We view the move favorably as it provides increase liquidity for the company. Given the prospect for a favorable environment for travel deals, we view Travelzoo as among our favored ways to play the travel industry and the subsequent improved advertising from its travel partners. We rate the shares Outperform with a $9 price target. 

Research reports on companies mentioned in this report are available by clicking below:

Bowlero Corp. (BOWL)

Codere Online Luxembourg (CDRO)

Engine Gaming and Media (GAME)

Motorsport Games (MSGM)

Travelzoo (TZOO)

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ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE

Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis.
Named WSJ ‘Best on the Street’ Analyst and Forbes/StarMine’s “Best Brokerage Analyst.”
FINRA licenses 7, 24, 63, 87

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RESEARCH ANALYST CERTIFICATION

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All views expressed in this report accurately reflect my personal views about the subject securities or issuers.

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appearance and/or research report.

Ownership and Material Conflicts of Interest
Neither I nor anybody in my household has a financial interest in the securities of the subject company or any other company mentioned in this report.

Wednesday, October 12, 2022

Michael Kupinski, Director of Research, Noble Capital Markets, Inc.

Patrick McCann, Research Associate, Noble Capital Markets, Inc.

Jacob Mutchler, Research Associate, Noble Capital Markets, Inc.

Refer to the bottom of the report for important disclosures

Overview: Developing A Shopping List. With the U.S. economy in the midst of a recession, we believe investors should be on the lookout for stocks on the “discount rack.” In our view, companies that possess ample funding and favorable growth characteristics could be well positioned to survive the downturn and be on the forefront of the subsequent economic recovery. This report highlights some of our favorite picks in the Entertainment & Leisure industries. 

Entertainment: Bowlero Bowls Over Its Peers. Bowlero’s most recent fiscal quarter illustrated a continuation of the entertainment industry’s COVID rebound. Bowlero’s Group Event revenue grew 140% from the prior year period while total revenue was up 68%. With cash flow margins above 30% and cash on the balance sheet of $132 million, the company is poised to continue making accretive acquisitions in the fragmented bowling industry.   

Gaming: Placing A Bet On Codere. The CDRO shares have been punished year-to-date (-58%) despite the company executing on its growth strategy as planned and maintaining pace to meet full-year guidance. Given a combination of robust growth in key Latin American markets and a balance sheet that boasts €84 million in cash and no LT debt, we believe the shares offer a favorable risk/reward relationship.  

Esports: Motorsport Games Gets Funding.  After a difficult second quarter a transformative restructuring plan has been implemented, which is estimated by the company to reduce overhead costs by 20% and save $4 million by the end of 2023. Additionally, Motorsport has secured $3 million from an existing credit line. These promising changes allow for more dollars to be spent on key revenue drivers.

Leisure. Travelzoo Readies A New Journey. Although Travelzoo (TZOO) is a digital media company, it is one of our favorite ways to play the recovering travel industry.

Investment Overview

Developing A Shopping List

The best time to buy stocks is typically in the midst of an economic recession. Investors begin to look beyond the economic weakness and begin positioning portfolios for an economic rebound. The hard part is determining when the economy is in the middle of the downturn. It appears by all standard definitions of an economic downturn that the U.S. is in an economic recession. But, how long will a downturn last? Should investors try to be cute to predict the midpoint of the downturn? 

Many economic pundits paint the current state of the economy against the canvass of the 1970s, a period of high inflation and low economic growth. There are many similarities. The Federal Reserve in the early 70s was willing to provide cheap money to fuel the economy, without much concern about inflation. In the second half of the 70s, the economy was rocked by fuel supply shortages and high inflation. During the Covid pandemic, both fiscal and monetary policy was designed to provide liquidity and to make sure that people were able to pay their bills during the economic lockdowns. This had the affect of increasing personal income, even though GDP declined 31.4% in 2020. As the economy reopened, there was significant demand for goods and services, some of which were in short supply because of the previous and recurring economic lock downs. Simplistically, this fueled inflation, high demand with a consumer that had disposable income and limited supply.

As Figure #1 Early 1970s chart illustrates, the US economy grew 9.8%, as measured by real GDP, from January 1972 to September 1975. Notably, the stock market, as measured by the S&P 500 Index, declined a significant 18.6%. This was a period marked by rising inflation due to government spending. The inflation rate, as measured by the US Bureau of Labor Statistics, was a reasonable 3.3% in 1972, but increased to 11.1% in 1974 and then moderated slightly to 9.1% in 1975. The inflation rate remained above 5% for the following 3 years. 

Figure #1 Early 1970s

Source: US Bureau of Economic Analysis and Yahoo Finance.

Given the current state of rising energy prices, many pundits paint the current US economic plight similar to the period of fuel shortages of the late 1970s. As Figure #2 Late 1970s illustrates, the US economy, as measured by real GDP, grew 13.5% from January 1977 to October 1981, an average of slightly more than 3% per year. Notably, inflation increased significantly, from 6.5% in 1977 to 11.3% in 1979, followed by 13.5% in 1980, and 10.3% in 1981. The stock market, as measured by the S&P 500 Index, did not react well, up 9.3% from January 1977 to October 1981, an average of 2.3% growth.

Figure #2 Late 1970s

Source: US Bureau of Economic Analysis and Yahoo Finance.

So, where are we now? In the present, the Covid induced government spending and stimulus related fiscal policy, large spending on the Ukraine war, and a Fed unwilling to reign in early signs of inflation has put the US in a dire economic position. Certainly, supply chain shortages contributed to the current rise in inflation, as well. The Fed now appears to have religion on inflation and is aggressively raising interest rates. The Fed indicated that it is willing to create economic pain to arrest inflationary pressures. Most certainly this will cause additional economic weakness. The stock market in the near to intermediate term will need to digest the likelihood of weakening corporate profits, as well. Furthermore, as it relates to the equity markets, other investment classes, such as bonds, may become more appealing, taking demand from the stock market. 

We believe that arresting inflation would set a favorable trajectory for the stock market, as investors position for the prospect of an economic recovery. To some degree, the 24.4% drop in the stock market, as measured by the S&P 500 index, from January 2022 to near current levels, anticipate some of the headwinds for investors described earlier in this report, including weakening corporate profits, the prospect of a further weakened US, and, even global economy, a move toward other investment classes, and stubborn inflation. What is different this time is that the Fed now appears to be aggressively tackling inflation. As such, the 47% drop in the stock market from highs in 1973 to the low in 1974 may not be a prelude to the current environment. It was a different Fed and it took different actions.     

We encourage a different approach than trying to time the market. Our advice is for investors to develop a shopping list and begin accumulating. But, be selective. We focus on companies with favorable balance sheets, or are well funded, have compelling growth characteristics, and attractive free cash flow. In other words, we look for companies that appear well positioned to come out on the other side of the recession and will benefit from an economic recovery. 

In this, our inaugural issue of the Entertainment and Leisure Industry Quarterly, we look at several companies that have favorable investment attributes for investors to consider. As Figure #3 Entertainment 12 Month Trailing Stock Performance Chart illustrates, the Entertainment Group performed poorly over the past 12 months. The Noble Entertainment index performed the best among our three Entertainment & Leisure sectors, down 16.1%, slightly outperforming the general market as measured by the S&P 500 Index, which decreased 16.8% in the comparable period. The Noble iGaming Index decreased 53.6% and the Noble eSports Index decreased 82.5% as these developmental industries were adversely affected by the closing of the capital markets to fund expansion. Given the weakness in these sectors, we look for the hidden gems. Some of our favorites highlighted in this report include: Bowlero (BOWL), Motorsport Games (MSGM), Travelzoo (TZOO) and Codere Online Luxemburg (CDRO)

Figure #3 Entertainment 12 Month Trailing Stock Performance 

Source: Capital IQ

Entertainment Industry

Bowlero Bowls Over Its Peers

While the entertainment industry is broadly defined, we take a look at the Experiential Entertainment industry, in general, and at Bowlero (BOWL), specifically. In the latest quarter, the Noble Entertainment Index outperformed the general market, as measured by the S&P 500 Index, up 0.7% versus the general market decline of 5.3%. One of the contributors to the outperformance of the Entertainment group was Bowlero, up 16.2% in the comparable period.

The Bowlero shares reacted well to the company’s fiscal fourth quarter earnings release on September 15^th. Q4 revenue of $267.7 million increased a strong 68% from year earlier levels and an impressive 42% above our estimate of $188.3 million. The strong revenue was attributed to favorable “walk-in” revenue, driven in part by a continuation of the Covid recovery. Adj. EBITDA was well above our estimate at $82.4 million, 45% higher than our forecast of $56.8 million.

How did Bowlero perform relative to its peers? As Figures #4 and #5 Entertainment Q2 Performance illustrates, Bowlero’s revenue growth for the comparable company peer second quarter outperformed its peers, save Live Nation. Live Nation’s revenue growth was 670%, reflecting the year earlier absence of events. Outside of Live Nation, Bowlero’s revenue growth of 68% compared favorably with the rest of its experiential entertainment peers, including Dave & Buster’s Entertainment’s, up 24%, and Vail Resorts, up roughly 31%.

Notably, management indicated that first quarter revenues are pacing 23% higher than year earlier results. As such, we raised our fiscal Q1 revenue forecast from $193.5 million to $222.5 million and raised our Q1 Adj. EBITDA estimate from $61.4 million to $72.0 million. Given strong operating momentum, we raised our fiscal full year 2023 revenue estimate to $983.5 million from $899.3 million and our Adj. EBITDA estimate to $322.2 million from $301.3 million. While we anticipate Bowlero’s revenue growth will slow as it faces more difficult comps due to the post Covid recovery and potential economic weakness, we believe that the company is well positioned. Furthermore, we expect that the company will grow revenues faster than most of its peers post Covid recovery due to the growth potential of its industry.

Figure #4 Entertainment Q2 Performance

Source: Company 10Qs

Figure #5 Entertainment Q2 Performance

Source: Company 10Qs

As of July 3, the company had $132.2 million in cash and $865.1 million in long-term debt. Debt is a comfortable 2.6 times our calendar year 2023 adj. EBITDA estimate, with net debt a conservative 2.1 times. With a large cash balance and strong cash flow generation (32% adj. EBITDA margin), we believe the company is well positioned to repurchase stock, upgrade its facilities, and/or acquire new facilities. The company has a large $200 million share repurchase authorization, of which it repurchased 3.3 million shares at an average share price of $10.07. There is a large repurchase authorization remaining. Furthermore, we believe that the company will seek acquisition fueled growth, possibly in other experiential center based facilities other than bowling. 

Notably, the BOWL shares trade at 8.6 times our revised calendar full year 2023 adj. EBITDA forecast, below peers which currently trade near 9.5 times. Figure #6 Entertainment Comparables highlight the stock valuations in the experiential entertainment group. Given its favorable growth profile, (the company has grown faster than its peers), a healthy balance sheet, compelling stock valuation, and prospects for acquisition fueled growth, we view the Bowlero shares as among our favorites in the sector and one to put on a shopping list for a recovery play.

Figure #6 Entertainment Comparables

Source: Capital IQ and Noble estimates. 

iGaming Industry

Placing A Bet On Codere

The past year has been tough on the iGaming industry. The Noble iGaming Index is down nearly 54% versus a negative 17% for the general market, as measured by the S&P 500 Index. In the latest quarter, the iGaming stocks seemed to have stabilized, up 1.6% versus a continued general market decline, down 5.3% for the general market. Interestingly, as Figure #7 Third Quarter Stock Performance chart illustrates, the iGaming sector was the best performing sector among the Entertainment and Esports sectors, which were up a modest 0.7% and down 38.1%, respectively. 

The shares of Codere Online Luxembourg could not fight the headwinds of the industry wide selling pressure. The CDRO shares dropped 70% from its post de-SPACing in December 2021 to near current levels. The weakness in the shares has been in spite of the company executing on its growth strategy as planned and maintaining its fundamental pace to meet full-year guidance. In the latest quarter, the shares drifted 3.9% versus the industry which increased 1.6%. 

Figure #7 Third Quarter Stock Performance 

Source: Capital IQ

We believe that the CDRO shares are a victim of throwing the baby out with the bath water. The poor performance of the iGaming industry in many respects is due to the developmental nature of the industry. Many of the companies included in the Noble iGaming index do not generate positive cash flow. As such, balance sheets have been supporting growth investment. Certainly, there will be a shake-out of players in the industry that do not have the financial capability to invest for growth. We believe that Codere Online is one of the survivors. 

First, the company has been executing on its development plans to expand its operations in Latin America, as evidenced by favorable quarterly results. The latest second quarter net gaming revenue grew 41% to $29.2 million, accelerating from the 24% year-over-year growth in Q1. At $11.9 million, Mexico accounted for nearly 41% of the revenue, growing 85% over the prior year period. Operations in Columbia contributed $2.2 million, with 56% growth. Even revenue in Spain grew 12%, despite restrictions on marketing in the country. 

Given a combination of robust growth in key Latin American markets and a balance sheet that boasts €84 million in cash and no LT debt, we believe the shares offer a favorable risk/reward relationship.  We believe the company is off to a good start since the completion of the SPAC merger, with strong execution of its growth strategy in Latin America. Management is continuing expansion with plans to add to the company’s presence in Argentina. In August, the company completed its application for an online gambling license in Cordoba, Argentina’s second-most populous province. If the company is granted a license, which would likely happen before year-end, it would begin operations shortly after the issuance. Notably, Cordoba will issue up to 10 licenses and Codere Online is one of just 10 applicants. Management believes there is an opportunity for the company to be a market leader in Argentina. To that end, the company expanded its partnership with Argentine soccer club River Plate, during the quarter becoming the club’s primary sponsor. The Codere logo is now on the front of the club’s jersey, which will increase the company’s visibility in the country.

Although the company is not yet cash flow positive, its operations in Spain generated its highest quarterly cash flow since Q2 2020. Adj. EBITDA in Spain was $3.6 million, enough to offset 87% of the $4.1 million adj. EBITDA loss from the company’s operations in Mexico. Interestingly, the marketing restrictions in the country came with a silver lining of lower competition. This is because the restrictions make it harder for newer operators to establish their brands in the country. Additionally, the lower marketing costs contributed to the strong cash flow generation. Notably, management expects similar cash flow generation going forward for the Spanish operations. We view the situation in Spain favorably as the consistent cash flow profile will help fund the expansion in Latin America and have a mitigating impact on the company’s cash burn.

Figure #8 iGaming Comparables highlight the stock valuations in the iGaming industry and the valuation gap between the industry and Codere. Near current levels, the CDRO shares trade at 0.2 times enterprise value to 2023 expected revenue. Like other companies that have negative cash flow, the CDRO shares have suffered in recent months. However, Codere Online does not appear to be in need of funding to execute on its growth strategy. As such, we believe that investors have not differentiated it from its peers. Our price target of $9 reflects a target EV/2023 revenue multiple of 2 times, more in line with peers of 4 times, but with additional headroom for upside. The shares are rated Outperform.

Figure #8 iGaming Comparables

Source: Capital IQ and Noble estimates. 

Esports Industry

The Esports industry had a difficult year and a difficult quarter in terms of stock performance. The horrible stock performance does not reflect the overall industry trends. Video gaming is still on the rise. It is estimated that there are 2.7 billion gamers worldwide, expected to achieve an estimated 3.0 billion gamers in 2023, based on Newzoo’s numbers. The video game market is expected to reach $159.3 billion this year and grow to $200.0 billion in 2023. So, what about the Esports industry? Esports viewership was elevated during the Covid lockdowns, with viewership significantly higher. As Figure #9 Esports Viewership Outlook illustrates, viewership trends are expected to increase even from the elevated 2020 levels to over 640 million viewers in 2025.  

In spite of the compelling industry fundamental trends, the individual esports companies in the space are struggling. Many of the companies were developmental, and, as such, were caught without investment spend as the capital markets closed. We find some gems in the rubble of the esports industry. The stock that we would like to highlight in this report is Motorsport Games (MSGM). Motorsport Games is a publisher of motorsport video games, with the rights to iconic racing games such as NASCAR and 24 Hour of LeMans. After a high of $15.50 in October 2021, the shares are currently trading at $0.78 per share. 

Recently, the company announced several moves to shore up its financing until it releases a set of new motorsport games in 2023. At that time, the company is expected to significantly improve its financial capability to invest in future updates to its expanding game portfolio. First, the company announced that it will decrease overhead by an annualized $4 million. Secondly, the company will receive a $3 million cash advance from its majority shareholder, Motorsport Network. This agreement is under the same terms as its previous $12 million line of credit, which had been paid off. Finally, the company plans to have a 1 for 10 reverse stock split. This move is to maintain NASDAQ listing requirements.  

Near current levels, the MSGM shares trade at an enterprise value below cash value, well below peers as Figure #10 Esports Comparables illustrate. We view the shares as an option on the company’s ability to fund its operations long enough to launch its new titles and cash in on its world class licensing agreements. We view the shares as a high risk/high reward opportunity, suitable only for speculative investors. We rate the shares Outperform with a price target of $2.50. Notably, our price target, which represents significant upside, implies a conservative target enterprise value of just 0.7 times 2023 revenue. Please read the attached report for important disclosures. 

Figure #9 Esports Viewership Outlook

Source: Newzoo/Statista

Figure #10 Esports Comparables 

Source: Capital IQ and Noble estimates. 

Leisure Industry

The Leisure industry is a very broad industry. In this report, we highlight a company that is in the Travel Leisure industry, but is really an advertising/media company. But, because its business is closely aligned with the travel industry, we have included it in this Leisure report. The company is Travelzoo. Much like the travel industry, there has been fits and starts with the recovery post Covid. Many countries are now open, travel restrictions are gone, and, even Covid/mask policies have relaxed. But, the industry, in general, and Travelzoo, in particular, are dealing with the weakening global economies. 

In the recent second quarter, the favorable revenue momentum from the first quarter fizzled. Total company revenues declined 7.3% year over year and were down roughly 4% from the first quarter. Some seasonality appears to be at play here. The question will be whether the softness in the quarter was related to general macro economic trends and if those trends appear to be evident heading into the third quarter. We believe that the weak quarter is related to choppiness in revenue due to the company’s transition toward advertising rather than “getaway” voucher sales. As such, we do not believe that there is an unraveling of the fundamental underpinning of the company. 

The company sold travel “getaway” vouchers during the Covid pandemic. Those voucher sales accounted for as much as 60% of total company revenues. Now that the travel industry is coming back, the company has pivoted toward its traditional advertising focused model. We estimate that “getaway” voucher sales were between 15% to 20% of total revenues in the latest quarter. Given that advertising represents a higher margin business, gross margins were higher than expected in the quarter (87.8% versus our 85.4% estimate). But, advertising was not as strong as what we had hoped. Management believes that travel demand increased beyond the capability of the travel industry. While prices increased for airline tickets, the industry was not able to deal with the demand given staffing shortages. Similarly, hotels faced the same issue. As a result, airlines have cutback on flights. More recently, given a waning consumer demand and softening US economy, airline prices are coming back down. We believe that the company is entering a more favorable environment given softening demand. In other words, the travel industry will need to provide favorable deals to lure consumers to travel. That is the sweet spot for Travelzoo.

Notably, the company has a flexible and improving balance sheet. As of June 30, the company had $26.6 million in cash and restricted cash and no long term debt. The company had $47.9 million in merchant liabilities (which reflects the amount of un-redeemed voucher sales). The amount of cash would be expected to be reduced as vouchers are redeemed. There are roughly $14 million in receivables. Management indicated that credit card receivables collection should significantly enhance its cash position in 2023. Given that the company will be generating positive cash flow, it is possible that the company will begin share repurchases. The company has a 1 million share repurchase authorization. The company did not repurchase shares in the latest quarter. 

Near current levels, the shares trade at just 4.6 times enterprise value to our 2023 adj. EBITDA estimate, using a fully-diluted share count of 14.9 million. Our price target of $10, reflects a target multiple of 8.3 times enterprise value to our 2023 adj. EBITDA estimate. We believe over the next quarter or two revenue growth acceleration could serve as a catalyst to drive the share price higher. The shares are rated Outperform. Please see the report for important disclosures and information. 

The latest report on the companies mentioned in this report may be downloaded by clicking on the respective company name:   

Bowlero (BOWL)

Codere Online Luxemburg

Motorsport Games Inc.

Travelzoo

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ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE

Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis.
Named WSJ ‘Best on the Street’ Analyst and Forbes/StarMine’s “Best Brokerage Analyst.”
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