Micro-cap investors seeking exposure to the robust tailwinds propelling the more than US$200 billion video game market should identify gaming stocks fortified against the tides of changing consumer sentiment, where brand loyalty must be continually refreshed to be maintained.
A micro-cap gaming stock equipped to thrive over the long-term and worth your full due diligence is GameSquare Holdings (NDAQ:GAME), which has a market capitalization of US$23.34 million. GameSquare’s share price has fallen by more than 50 per cent year-over-year (YoY) despite the underlying business growing revenue by more than 10 times since inception in 2020 and placing itself on a rapid path to profitability estimated by year-end 2024. Catalysts towards this end include:
- A management team and board of directors with the accounting, gaming and media experience to create value or acquire it to the benefit of shareholders.
- One of the largest gaming media networks in North America, as verified by Comscore, with 60-65 per cent of total revenue generated through activity with influencers.
- A multi-pronged approach to generating revenue through software-as-a-service, creative agency services and owned and operated IP, making GameSquare one of the go-to names for brands (slide 17) looking to leverage trends among Gen Z, Gen Alpha and Millennial audiences.
Let’s break down GameSquare’s multiple revenue streams to paint a more detailed picture of why its stock is primed for a re-rating.
GameSquare’s small but mighty software-as-a-service segment
The micro-cap gaming stock’s software-as-a-service (SaaS) segment offers access to a proprietary platform that provides data analytics, influencer management and marketing services, as well as managed services, offering investors highly leveraged exposure to the more than US$20 billion influencer marketing market, which has tripled since 2019.
The SaaS segment generated US$10 million in high-retention, high-margin revenue in 2023 serving eight of the 10 largest global game publishers and has continued this success into 2024, most recently registering US$1.6 million in preliminary Q3 sales.
Notable brands under the segment include Stream Hatchet, a provider of advanced analytics, including viewership and engagement, on social live streaming platforms such as Twitch, YouTube Live and Trovo, and Sideqik, a provider of end-to-end creator relationship management solutions to brands and marketers.
GameSquare’s end-to-end creative agency segment
Supported by its robust SaaS technology suite, GameSquare’s end-to-end creative agency segment specializes in strategy, content campaigns, live events, as well as media and placements. These are backed by relationships with industry leaders such as Epic Games and a track record of successful activations for the likes of Prime Energy, Coca-Cola, Mastercard, Samsung, McDonald’s, Converse and Jack in the Box.
Longer-term contracts with these high-profile clients and expanded publisher relationships contributed to the segment taking in US$32 million in revenue in 2023. This sets the stage for GameSquare to expand beyond gaming into mainstream youth and pop culture, de-risking the company’s growth prospects in the global US$356 billion digital advertising market.
The segment has only increased the momentum behind its growing market share in 2024, with US$15.5 million in preliminary revenue collected in Q3 2023, and a number of recent collaborations with top brands including Topgolf, 5-Hour Energy and a six-figure retainer deal with Clout – a platform for esports enthusiasts – to offer its users new gamified experiences to enhance engagement and build community.
Notable brands under the creative energy segment include Zoned Gaming, a marketing agency operating at the intersection of gaming and pop culture, and Code Red, an esports agency led by management active since the inception of the industry more than two decades ago.
GameSquare’s highly prospective owned and operated IP segment
The SaaS and agency segments’ high-margin and long-life revenue has provided GameSquare with the stability required to build a portfolio of owned and operated intellectual property (IP) at the forefront of esports and content creation.
Its most important holding, FaZe Clan, one of the world’s largest gaming brands, commands more than 250 million followers and was the #1 brand by minutes watched on Twitch in September 2024, making GameSquare one of the largest gaming media networks in North America, as verified by Comscore.
GameSquare’s chief executive officer, Justin Kenna, FaZe Clan’s former CFO, led the acquisition in March 2024 for pennies on the dollar. Kenna recognized that reining in costs at the company, valued in excess of US$1 billion in market capitalization only months earlier, while returning creative control to FaZe’s founders to refresh the brand, offered exponential upside given the brand’s proven money-making ability (slide 12).
FaZe Clan has approximately tripled viewership since the acquisition closed, driven by numerous high-profile talent signings and streamlining the business into FaZe Esports and FaZe Media, both of which are growing. Viewership has continued to trend upward throughout 2024, as evidenced by FaZe’s September subathon, which saw FaZe Ronaldo become the most-watched streamer in the world.
GameSquare is expecting the gaming brand to enable US$18 million in annualized cost savings in 2024, contributing to meaningful improvements in profitability through the year.
Other notable drivers in the owned and operated IP segment include:
- IP with proven success such as YouTube gaming star TimTheTatman‘s Tailgate event; Ninja NYE, an event with global gaming personality and GameSquare’s chief innovation officer, Tyler “Ninja” Blevins; and NFL 4 The Fans Live, an event series in collaboration with the NFL that blends interactive gaming and creator-driven content.
- Esports tournament winnings, with FaZe Esports taking home a record US$2 million in prizes at the 2024 Esports World Cup.
- Custom merchandise for teams, organizations and brands through the Mission Supply Co., a specialist in tailoring the journey from design to sales for optimized user engagement.
According to Kenna’s recent interview with Stockhouse’s Lyndsay Malchuk, investors can expect more long-term brand deals from FaZe Clan to make their way through the pipeline in 2024 – as recently highlighted by multi-million-dollar signings with G Fuel and Rollbit – positioning the owned and operated IP segment to surpass its US$56 million in revenue collected in 2023, and the company to deliver on 2024 guidance, which it increased in Q3 thanks to numerous green flags for profitable growth.
GameSquare’s undervalued growth story
GameSquare has parlayed its diversified exposure to the gaming and digital advertising industries into 12.3 times revenue growth from US$4.22 million in 2019 to US$52 million in 2023, and the company expects to more than double this total to between US$105 million and US$110 million in 2024 driven by organic growth and margin expansion. Its conviction is substantiated by:
- A steady increase in customers on long-term retainers.
- Average contract value growth of 46 per cent over the past nine months.
- Record monthly contract wins in August 2024.
- More than tripling Fortnite world-building campaigns deployed.
- A continued focus on cost-cutting initiatives and opportunities for incremental operational efficiencies.
Each of these milestones are contributing to GameSquare’s rapid rise to profitability, which is evident from the micro-cap gaming stock’s leap to US$17.7 million in revenue in Q1 2024, up from US$2.8 million YoY, while improving gross profitability by 2.6 times to US$3.4 million.
The company followed up this value-accretive quarter with record revenue of US$28.6 million in Q2 2024, up from US$11.4 million YoY, thanks to accelerating momentum across the business, including a robust 28 per cent quarterly increase in FaZe Clan viewership. The company supported this exponential revenue growth with a US$2.5 million quarterly improvement in adjusted EBITDA on a pro-forma basis, a 1.5 times YoY improvement in gross profits to US$4.2 million, and more than US$36 million of non-dilutive capital raised in 2024 through the end of the quarter to foster growth initiatives.
Momentum towards profitability continued unabated in Q3, with preliminary results expecting revenue in excess of US$26.5 million and a US$3 million improvement in adjusted EBITDA from Q2, followed by a Q4 that builds upon this trend of efficient growth, with Kenna expressing optimism in the interview about a 2025 marked by robust locked-in revenue under longer-term, higher-margin deals across all business segments.
GameSquare’s multi-faceted operations, firmly established in the technology, marketing, media and IP sub-sectors of the US$200 billion video game industry, have provided investors with a track record that suggests the company is positioned to increase its dominance in line with shareholder value creation. Large investments from the likes of Dallas Cowboys owner Jerry Jones and the Goff family, coupled with 31 per cent insider ownership, support this thesis.
That said, despite GameSquare’s exponential and efficient growth trajectory, investors in the gaming stock have been saddled with a more than 50 per cent loss YoY, likely because of the tepid demand for micro-cap stocks that comes with periods of aggressive monetary policy, such as the present moment. This state of affairs offers readers a chance to pick up shares today at a wide mismatch between price and intrinsic value and capitalize on the market’s cluelessness as GameSquare grows towards near-term profitability.
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(Top image: GameSquare Holdings)
