Will Enthusiast Gaming Stock Change Course After the Activist Attack?

Last week’s cheer in Enthusiast Gaming stock is reversing this week.

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It looked like things were falling in place for Enthusiast Gaming (TSX:EGLX)(NASDAQ:EGLX), but soon, an activist investor sneezed.

Greywood Investments has begun a campaign called “Upgrade EGLX” in which it is seeking an ouster of the current chair Adrian Montgomery and other board members. Notably, Enthusiast stock recently started showing revival in otherwise weaker markets after its strong Q1 2022 results.

EGLX stock is still down 70% since last year

A $340 million company, Enthusiast Gaming, runs media platforms globally for video game and esports fans. It earns revenues from its over 100 websites and 1,000 YouTube channels that contain video game-related content like blogs, news, reviews, live streams etc. The company claims that it has 300 million monthly active viewers across its suite of platforms.

Greywood claims to be the largest shareholder and holds a 9.3% stake in Enthusiast. In a letter addressed to it, the activist investor has stated, “Our primary and clear conclusion is that the company’s current chief executive officer (‘CEO’), Adrian Montgomery, is a detriment to the company’s management, operations, communications, and growth strategies and Enthusiast is failing to realize its potential under his leadership and under the direction of the board of directors, as it is currently constructed.”

Strong growth outlook from the management

Note that Enthusiast Gaming saw a striking revival in its performance during Q1 2022. Its revenues jumped 57% year over year, and the management conveyed its aim to turn EBITDA positive this year.

Moreover, gross margins improved to 29% in Q1 2022 from 24% in Q4 2021. EGLX stock broke out after a positive earnings surprise, and the stock soared a handsome 43% in three days early last week.

Activist investors buy small stakes in companies with large growth potential but underperforming. Then they propose operational changes to the board in order to unlock more shareholder value. However, if the board fails to do so, activist investors take up proxy fights as well.

Interestingly, Greywood currently has a higher stake in Enthusiast than its board members (about 6%).

Canada’s energy giant Suncor Energy felt activist pressure last month when Elliott Management criticized the company over its underperformance. Elliott holds a 3.4% stake in SU and has suggested overhauling its board and selling its retail business.

Importantly, Suncor Energy stock has been rising since then, partly because of the activist’s attack and partly due to rallying oil and gas prices. SU stock has gained 60% in 2022, which is in line with peer energy stocks.

In response to Greywood, Enthusiast has highlighted its recent quarterly performance and its ongoing growth journey. The gaming company has also condemned the activist investor’s attack, saying the letter is misleading and baseless.

Bottom line

EGLX stock tumbled as much as 13% and settled 7% lower after Greywood released its letter on May 24.

Enthusiast is a loss-making company currently and turning EBITDA positive this year will certainly be delightful for its investors. However, broad market weakness could still weigh on EGLX stock. And now, the activist and the company board fight could fuel the volatility.  

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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