Is There An Opportunity With Enthusiast Gaming Holdings Inc.'s (TSE:EGLX) 23% Undervaluation?

Yahoo

04-03-2025

Enthusiast Gaming Holdings' estimated fair value is CA$0.16 based on 2 Stage Free Cash Flow to Equity
Enthusiast Gaming Holdings is estimated to be 23% undervalued based on current share price of CA$0.13
Analyst price target for EGLX is CA$0.38, which is 132% above our fair value estimate
Does the March share price for Enthusiast Gaming Holdings Inc. (TSE:EGLX) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
View our latest analysis for Enthusiast Gaming Holdings
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (CA$, Millions)
CA$1.24m
CA$1.57m
CA$1.87m
CA$2.14m
CA$2.37m
CA$2.57m
CA$2.73m
CA$2.88m
CA$3.00m
CA$3.11m
Growth Rate Estimate Source
Analyst x1
Est @ 26.72%
Est @ 19.42%
Est @ 14.30%
Est @ 10.72%
Est @ 8.21%
Est @ 6.46%
Est @ 5.23%
Est @ 4.37%
Est @ 3.76%
Present Value (CA$, Millions) Discounted @ 11%
CA$1.1
CA$1.3
CA$1.4
CA$1.4
CA$1.4
CA$1.4
CA$1.3
CA$1.2
CA$1.2
CA$1.1
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = CA$13m
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 11%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CA$3.1m× (1 + 2.4%) ÷ (11%– 2.4%) = CA$37m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CA$37m÷ ( 1 + 11%)10= CA$13m
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CA$26m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CA$0.1, the company appears a touch undervalued at a 23% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Enthusiast Gaming Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 11%, which is based on a levered beta of 2.000. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Strength
Debt is well covered by earnings.
Weakness
No major weaknesses identified for EGLX.
Opportunity
Forecast to reduce losses next year.
Good value based on P/S ratio and estimated fair value.
Threat
Debt is not well covered by operating cash flow.
Has less than 3 years of cash runway based on current free cash flow.
Revenue is forecast to decrease over the next 2 years.
Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Why is the intrinsic value higher than the current share price? For Enthusiast Gaming Holdings, we've compiled three pertinent aspects you should further research:
Risks: You should be aware of the 2 warning signs for Enthusiast Gaming Holdings we've uncovered before considering an investment in the company.
Future Earnings: How does EGLX's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSX every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.