Esports Entertainment Down 40% – The Donner Party Of Online Betting?

Esports Entertainment (NASDAQ: GMBL) stock is down 40% as a result of a rather muffed attempt at a capital raise. The pricing of the issue – to raise $15 million – only emerged after market close on Friday and that price does not please in the slightest.

It might be unfair to do this but we could suggest that Esports Ent is the Donner Party of the current landrace.

The underlying concept here is that when the law changes or technology does, there’s then a “landrace” to occupy that new space. Think of Facebook colonising social media say. Or whoever it was – possibly not Donald Trump – who ended up dominating Atlantic City gambling. There’s a new space available and the first people there, in force and volume, are going to be able to squeeze that position for years to come. Just like those wagon trains heading out west – the people who staked out the thousands of acres claims, their descendants are still rich a century and a half later.

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The thing about landraces is that while some indeed do win many more try and don’t win. The Wagons Roll version of this being the Donner Party, a caravan that got stuck in the California mountains over winter and ended up having to eat each other to survive. If we were unkind this is where we might place Esports Entertainment.

Online gambling and esports themselves are both huge growth areas. So, a landrace then, colonise that space. That’s exactly what Esports Ent is trying to do but not, apparently, succeeding at.

The last set of results showed revenues up, that’s good. But the loss was up by very much more than the revenues – that’s not good. Sure, in a landrace you spend capital in order to establish that position that can then be milked. But you do need to have enough capital to establish the position. There was a significant consensus miss in those results and that more than halved the Esports Ent stock price.

Which, well, that could be OK, it depends upon the burn rate. How much capital does the company have to see through the plans? Can it actually colonise and then make the exploitation turn around?

The problem being that the results – bad results, which more than halved the stock price recall – was swiftly followed by a capital raise. A capital raise which, when compared to the losses just suffered, didn’t provide a capital ramp for very long. Then we find out the actual price at which that capital was raised. A $34.5 million loss (by GAAP) and then raising $15 million on expensive terms?

This isn’t what investors want to see, no. And thus that cumulative loss since Friday of 40% and counting. Esports Entertainment might have the best plan in all of history but it’s not obvious that it has the capital to execute it – thus the shyness of the stock price.