Small-cap stocks have the potential to increase your wealth at an exponential rate. However, investors should also note that buying stocks of smaller companies carries significant risks as they are impacted by market volatility as well as macro-economic events. Though they have the potential to grow at a fast rate, the lack of stability will be a concern for investors with a low-risk appetite.

Here, we look at one small-cap stock called Super League Gaming (SLGG - Get Rating) that has already gained a staggering 90% in 2021, but trading down 40% today.

Business overview

Super League Gaming is an Esports and gaming community company. It provides a platform for gamers to connect and engage with others and offers players the ability to create gameplay-driven experiences that can be shared. This includes the opportunity to watch live streaming broadcasts as well as gameplay highlights across multiple channels.

Super League aims to build an inclusive and global brand and its content offerings feature over a dozen of the top video game titles in the world. It places itself at the intersection of gaming, entertainment, and experiences and multiple stakeholders in this space including video game publishers, traditional sports organizations, as well as television companies are reaching out to Super League to provide integrated solutions.

In a nutshell, Super League’s end-to-end technology enables mass participation in competitive gaming and viewing entertainment.

Super League Gaming: Q3 results

Super League monetizes in two distinct ways. It attracts brand sponsorship and advertising revenues by serving as a marketing channel for brands to reach their target audiences across its physical and digital network of esports leagues and experiences.

Further, as players integrate with the company’s gameplay experiences, often free-to-play, it looks to introduce opportunities to monetize the gamer through a recently launched consumer subscription offer and tournament fees for advanced gameplay.

In the third quarter of 2020, Super League Gaming reported sales of $718,000, indicating a year over year growth of 105% compared to sales of $350,000 in the prior-year quarter. The revenue growth was driven by a significant increase in the company’s ad and content sales. It shows that the company is focused on accelerating the monetization of its ad inventory as well as gameplay content.

Its cost of sales was up 70% at $327,000 and rose at a slower pace than revenue due to the increase in lower-cost advertising and content sales revenue. Operating expenses totaled $4.7 million which was similar to the prior-year numbers.

The September quarter was the company’s highest quarterly revenue while its rising gross margins reflect lower costs of digital activations. It ended Q3 with 2.4 million registered users, compared to the 1 million figure at the end of 2019.

The bull case for Super League Gaming

The gaming industry is a high growth vertical and according to the company’s presentation, the gaming audience on YouTube and Twitch stands at 400 million. This is higher than the combined audience on streaming sites such as Hulu, ESPN, and HBO.

Super League Gaming’s viewer impressions stood at 1.4 billion in the first nine months of 2019, which was already 12x higher than 2019.

Analysts tracking the stock expect sales to rise 93% to $2.1 million in 2020 and by 141.6% to $5.05 million in 2021. Its loss per share is also forecast to improve from $1.84 in 2019 to $0.63 in 2021. The stock is valued at a market cap of $130 million indicating it has a price to sales multiple of 26x which is steep.

Of the two Wall Street analysts covering the stock, one has a price target of $6 for SLGG and the other has a price target of $4.50.  Therefore the average of these two targets is $5.25, which is actually where the stock is trading today.

Super League Gaming will remain volatile as it gains traction in the rapidly growing Esports space. However, its expanding addressable market and rapid growth in top-line revenue, as well as improving profit margins, make it a stock to add to your watchlist.

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SLGG shares were trading at $5.25 per share on Friday afternoon, down $3.57 (-40.48%). Year-to-date, SLGG has gained 85.51%, versus a 1.12% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...

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