(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
These past few weeks, after a year of absence from the stock market, I deep dived into equities again. I was looking to put some profits of 2021 to work while diversifying outside of cryptoassets. This will sound insane to some and ridiculous to others, but my aim was to find a 6 to12 month investment with a 50% potential return. The choice fell on a small-cap that I stumbled upon during my research and that stood out because of its juicy financials, namely Endor AG.
Endor, with its headquarters in Landshut, Germany, is one of the global leaders in input devices for game consoles and PCs. They sell high-end steering wheels and accessories for virtual racing under the Fanatec® brand.
Virtual racing, commonly referred to as sim racing, is a growing niche in the video game industry where gamers confront each other in multiplayer races. Inspired by real-world cars and circuits, some simulations are laser-scanned and accurate to the millimetre, thereby giving players the feeling of driving on the actual race track. Finally, to maximise their performance and push the boundaries of realism, fanatics are willing to spend hundreds to thousands of bucks for specialised sim racing gear.
This is where Fanatec comes into play. Fanatec is infamous for the high quality of engineering and the premium prices of its products. Their mission is to:
- Advance sim racing as a whole.
- Interconnect sim racing and motorsport.
- Make high-end sim racing equipment affordable.
Over the years, they have conquered 80% of the market share and the largest online presence in the sim racing industry. Due to their brand recognition and for pioneering technological innovations like real-world compatible steering wheels, I jokingly call them the Apple of sim racing.
Fanatec revolutionized the virtual racing industry and became synonymous with motorsport as a whole.
- OC Racing, Youtube
If you’ve survived the introduction, I guarantee you will enjoy the rest of this article. First, let me explain what sparked my interest in Endor.
The Good
Management
Thomas Jackermeier, who turned his gaming hobby into his profession, is at the reigns of Endor AG since its inception in 1997. If you listen to some of his interviews, you will notice that he knows his hardware and customer base better than anyone else.
In my eyes, one very important metric to look at is insider ownership, also known as Skin in the Game. Executives can talk all they want, but the best sign of confidence is putting their own money on the line. Over the years, Thomas Jackermeier and his family have accumulated about 50% of Endor’s outstanding shares, which by far beats my expectations.
Growth Potential
The developed products were never sold under the name Endor, but rather under the brand name Fanatec, providing Endor with the flexibility needed, to be able to introduce new brands into varying markets as desired.
With time, Endor not only developed an excellent relationship with console manufacturers, but also with the most recognised and most exclusive car manufacturers in the world.
- Fanatec.com
For the foreseeable future, Endor has enough room for growth in the sim racing niche alone. Despite their priciness in contrast to the competition, new releases always sell out in a matter of minutes or hours. They have loyal customers with big pockets, but they also made an entrance in the lower-budget market with the new CSL DD direct-drive product line, which is referred to as a game changer in the sim racing scene.
Endor’s production literally cannot keep up with the demand, and this has been a burden on their most recent sales. Fortunately, Mr. Jackermeier gave a positive outlook in the Q3 2021 earnings report:
We are aligning the company so that we can handle sales of 200 to 250 million euros in the future without further adjustments.
This is more than double the expected revenue for 2021. The report further highlights that:
The entire IT infrastructure is being renewed, personnel acquired and major investments made in R&D and marketing.
Endor AG had a record inventory of raw material at the end of November.
Additional impetus in 2022 should also be provided by the new product launches that Endor AG is planning for the new editions of the classic games GT7 and Forza Motorsport, which should result in a significant revival of the steering wheel market.
Stats & Valuation
Endor AG is a Germany-listed company valued at €325 million ($369 million). At the moment, they have a net profit margin of 13.66% while their 3-year CAGR sits at 69.22%, which means they comfortably pass the Rule of 40(13+69=82>40).
Endor has a trailing P/E ratio of 25 and a P/S ratio of 3.45. If markets were to go back to risk-on behaviour one day, these metrics would look dirt cheap in comparison to historical valuations for growth stocks.
To make a conservative growth forecast, let’s assume a €225 million yearly revenue at one point in the next 3 years. If we multiply that by a 3.45 P/S ratio, we get a €690 million market cap, which equals to a 112% return from the current €325 million valuation. Finally, if we subtract an arbitrary 12% linked to share dilution, we get a 100% potential return on investment.
Technical Analysis
The image below shows that Endor’s price action has been in an upward trend on a multi-year timeframe, in a downward trend for the past couple of months, and is now testing the 20€ support level.
For what it’s worth, my entry is at 20€ per share and I’d only add to my position if we revisit sub 18€ levels.
Before you long Endor with your child’s college money, please have a look at the risky risks involved.
The Bad
Supply Bottlenecks
For 2021, Endor’s expected sales are below the previous year’s €90 million. How do they have declining sales when demand is through the roof?
Apparently, necessary structural adjustments are to blame:
The supply bottlenecks and logistics problems, particularly in China, prevented sales from developing in line with the very good demand in the first nine months.
Yes, we want to be more prepared in this area in the future and are currently examining production sites in Eastern Europe, such as Romania and Hungary, in addition to production in China.
- Endor.ag
For 2022, assuming supply chains don’t break down completely, the Board of Executives expects significantly higher sales growth again.
Low Investor Awareness
Whereas sim racers have known Fanatec for years, the microcap is virtually unknown among investors. At the time of writing this article, the stock is analysed in fewer than 10 Youtube videos, Seeking Alpha, or Motley Fool articles.
Low liquidity
As for many small cap stocks, low liquidity is a real struggle for Endor. In 2021, its management has resolved an 8-for-1 share split to increase liquidity through the then higher number of shares in circulation. Nevertheless, its trading volume remains minuscule. To further remedy the problem, they will pursue an additional XETRA listing and are considering a secondary listing in the US.
In my eyes, inefficient markets are an opportunity to be early in an immature asset. Taking asymmetric bets before they are widely accepted is risky, but also a competitive edge if you have the appropriate time preference.
Share Dilution
According to simplywall.st , Endor AG shareholders have been diluted last year, with total shares outstanding growing by 4.1%. When asked about future capital increases, Endor’s management responded they were already in a very comfortable situation. Therefore, I expect the dilution rate to decrease in the coming years.
Conclusion
In the grand scheme of things, Endor is still in its infancy and will surely benefit from the future growth of the gaming and sim racing industry. This gives me confidence that it can do a 10x in a possible future timeline, but for now, all my attention is on 2022.
If you liked this article, feel free to share your impressions in the comments and follow me on Medium or Twitter.
Credits
Special thanks to Tb, ywei and Ghostrider for their reviews and comments in the final revisions of the piece.
References
Images:
- Fanatec podium steering wheel — https://youtu.be/mGWdroBuwJQ
- Gigachad reacts to comments — https://youtu.be/-JbwKhgQm50
- Fanatec Gran Turismo DD Pro — https://youtu.be/MA4_qbIMAeQ
- Endor AG chart — https://www.tradingview.com/chart/8noNRPiw/?symbol=MUN%3AE2N
Text:
- Fanatec website — https://fanatec.com/eu-en/about-us
- Small-cap definition — https://www.investopedia.com/terms/s/small-cap.asp
- How Fanatec is dominating sim racing — https://youtu.be/7RVz6d48RyA
- Logitech G29 to a Fanatec CSL DD first impressions — https://youtu.be/isXKhrve3j8?t=490
- Endor AG press — https://endor.ag/press/?lang=en
- Endor AG investor relations— https://endor.ag/investor-relations/?lang=en
- Thomas Jackermeier interview — https://youtu.be/OCe4q-i1cFk
