Allied Esports Entertainment: Like buying a $1 lottery ticket for 59 cents
When I last reported on Allied Gaming & Entertainment (NASDAQ:AGAE) stock in April 2022, I implied that the company’s common stock was a $1 lottery ticket trading at 75 cents . The reason for this is pretty simple; Allied Gaming is a very small company but has a lot of money. With only $5.1 million in revenue over the trailing twelve months from the first quarter earnings. If you were judging the common stock based solely on the price-to-sales ratio of 8.3, you probably wouldn’t do anything about it.
Since this article, the company has seen another CEO change from Lyle Berman to Yinghua Chen. There was also a rebranding of the business unit from Allied Esports Entertainment to Allied Gaming & Entertainment. The corporate entity still owns the Allied Esports business and a handful of other assets. What hasn’t changed is that the company is burning cash and generating very little operating income. In this update we take a look at the balance sheet, revenue and company strategy going forward.
Over the past year there have been some notable changes to the company’s accounting approach. First, the cash on the sheet was transferred into CDs with maturities ranging from 3 to 12 months. This has helped minimize quarterly cash burn in recent quarters as the company now generates interest income on these holdings.
Data from YCharts
The second significant change in the company’s balance sheet management was a $10 million stock repurchase program announced last November. Given the very small market capitalization and significant discount to the assets at which the shares are currently trading, this program could be taken as an indication that AGAE shares should have something of a floor price.
In the fourth quarter of 2022, Allied issued $600,000 from this repurchase plan at an average share price of $1.02. The company has continued to actively repurchase shares this year, purchasing an additional 1.1 million AGAE shares for $1.5 million during the first quarter. These purchases were made at an average share price of $1.28.
Data from YCharts
For most of April and May, AGAE’s shares traded at a significant discount to Allied Esports Entertainment’s first-quarter buybacks. I suspect this could be a result of the financial industry stress we’ve been experiencing since March given how much value in AGAE stock derives from financial instruments.
In my article last year, I spent a lot of time offering thoughts on the company’s NFT project called EPICBEAST. I won’t spend nearly as much on it this time as it’s clearly a failed endeavor. In the three months ending March of this year, Allied booked only $20 in revenue from this project, and the Twitter handle associated with EPICBEAST had been inactive for over six months. I think it’s safe to say the project is dead.
EPICBEAST is part of the company’s multimedia content revenue segment. This segment also includes revenue from the company’s streaming business through platforms such as YouTube (GOOG) and Twitch (AMZN). Given the popularity of eSports with younger audiences and the long-term tailwind that streaming companies should benefit from, you’d think this is an area where Allied could actually see some growth. That obviously didn’t work.
Allied Esports Twitch channel engagement has plummeted. According to data from TwitchTracker.com, hours watched and average viewership dropped to pre-pandemic levels last summer. Year over year, AGAE’s multimedia content revenue fell from 9% of total revenue to nearly zero.
Allied Gaming & Entertainment’s approach as a corporate entity is a bit confusing. The board initially examined merger and acquisition options as well as a complete exit from e-sports in view of the high burn rate. On the company’s fourth-quarter conference call, new CEO Yinghua Chen seemed to hint that Esports is currently undergoing a restructuring:
After reviewing a wide range of options, the Board concluded that the best way to maximize shareholder value is to restructure our esports business operations and expand our focus to a broader range of gaming and entertainment products.
We’ve also seen recent content initiatives and branding deals mostly related to esports. Yinghua again:
We are confident that the advancement of Allied’s original focus on live events and our cross-platform content, as well as the addition of new revenue drivers such as virtual entertainment events and online gaming tournaments, will result in positive financial results going forward.
Jud Hannigan, CEO of Allied Esports, resigned in October amid apparent motivation to adjust the business unit’s underlying operations. It is difficult to see the vision here. And as far as I can tell, there was no conference call for the first quarter as part of the earnings release.
The biggest risk of owning AGAE stock is that the company continues to burn cash through an unprofitable deal and destroys enterprise value through its leasing commitment through 2027. That’s purely speculative, but I don’t think it’s likely. With the prospect of a looming recession, I think there’s a greater chance that the deal will end well before the company has run out of cash and shareholders are getting liquidation payouts at a premium to current share prices.
A less direct risk, however, is exposure to financial institutions:
The Company maintains cash, cash equivalents and short-term investments with major financial institutions, which often exceed the Federal Deposit Insurance Corporation’s insurance limits.
This is probably a much bigger concern than it was a few months ago as the stress in the banking system may not be over yet. In addition, the company has also disclosed a significant customer concentration risk. At the end of the first quarter, 100% of AGAE’s receivables are from a single customer. One could certainly argue that this reinforces the notion that liquidation is not a pipe dream. There’s no point in taking a loss to serve a customer in a downturn.
Despite the certainly strategic stance of Allied Gaming & Entertainment executives that there is a determination to grow an underlying business, I simply don’t see a viable path forward for the company at this time. In addition, any hope of merging with another company seems to have been exhausted. From my perspective, it seems clear at this point that AGAE shareholders are no longer invested in a company. Buying AGAE stock today is more like buying ice cubes at a discount and hoping they don’t all melt before you can put them in the freezer.
Even if the company writes down all of its non-financial assets and pays off liabilities with cash, the shares trade at 59 cents at liquidation value. AGAE stock is trading at half its tangible book value of $2.25 and the company still has the clout of nearly $8 million in buyback plans. I licked my wounds from last year. I think it’s worth giving AGAE another try with a small speculative buy.
Editor’s Note: This article covers one or more Microcap stocks. Please be aware of the risks associated with these stocks.