FaZe Holdings: Focusing On Growth, I’m On The Sidelines (NASDAQ:FAZE)

Los Angeles-based gaming outfit FaZe (NASDAQ:FAZE) went public with little fanfare and near-zero hype in sharp contrast to its esports competitions and media platform. The company took the now largely dead path of using a blank check company to list its shares on NASDAQ in a deal that would value it at $725 million. It is now worth $338.6 million with the common shares down 53% from the SPAC reference price. The go-public market valuation had already been reduced by 25% from when the deal was initially announced last year.

Can the company turn its large social media following and esports legacy into concrete year-over-year revenue growth and eventual profit? It depends on who you ask. FaZe already has a small share of bears who have been clear about their criticism of the company. Indeed, the 12-year-old company has quite a vivid history with a plethora of controversy and negative headlines. However, that’s to be expected for a space as young, erratic, and chaotic as esports.

FaZe at its core is a video game company. The company was started back in 2010 by a bunch of Call of Duty players who met on Xbox Live and then started a YouTube channel together to show compilations of sniper trick shots and general gaming antics. It has since grown to encompass around 11 competitive esports teams in games like Fortnite and Counter-Strike. The company counts Snoop Dogg on its board and sells t-shirts, sweatpants, and other merch on its website. Critically, FaZe has been a part of online gaming culture for years. This position has allowed the company to build a large and young audience of both millennials and Gen Z across its social media platforms where it has over 510 million followers combined. Whilst large, a significant number of these are likely to be overlapping with followers engaging with multiple FaZe Clan members.

Revenue Ramp Built On Brand Strength

FaZe last reported earnings for its fiscal 2022 second quarter in August, the first as a public company. This saw revenue come in at $18.8 million, a 22% increase over the year-ago quarter. The company realized a gross profit of $6.4 million as its gross margin on revenue at 34% increased by 868 basis points sequentially and from a gross margin of 13.62% in the year-ago quarter. Net losses for the quarter came in at $9.3 million, an increase from $7.6 million in the year-ago quarter with cash burn from operations coming in at $16 million.

This rate of cash burn is problematic. Firstly, it was the highest rate ever recorded despite the higher revenues and was a more than 122% increase from its comparable year-ago quarter. Further, free cash outflow was $17.6 million during the quarter with capital expenditure at $1.6 million. Secondly, the company only managed to raise net proceeds of $57.8 million from its go-public transaction. This was down from an initially estimated $218 million that was meant to come from a combination of PIPE investors and cash from B. Riley Principal, the SPAC sponsor. Redemptions came in at 92% and $71.4 million of $100 million in PIPE commitments defaulted on their obligations.

At the current rate of burn, the company should have just under a full year left. Of course, FaZe will likely lean on dilution to expand out this runway with management already taking steps to grow their topline in the hopes it flows through to the bottom. The company is also gearing to sell new shares with the recent filing of a Notice of Effectiveness with the SEC. FaZe is aiming to issue an additional 5.9 million common shares. The filing also creates the option for share sales by existing shareholders once the share lockup period ends.

Will Sandwiches Help The Commons?

FaZe is exploring other methods to use its brand to make money with gambling and ghost kitchens being thrown in the hat. In this pursuit to monetize the FaZe brand, the company has partnered with a decentralized gaming virtual world called The Sandbox to develop a plot of land. FaZe World will host virtual events, games, and digital product releases and will allow new ways for the company’s followers to engage with the FaZe Clan roster. The company also partnered with DoorDash (DASH) to launch FaZe Subs, a ghost kitchen brand. The eclectic mix of revenue drivers from the metaverse and sandwiches to clothing does not paint an entirely strong picture but is necessary for growth.

I am not a buyer here though. The high cash burn and dilutive roadmap to plug this do not entice confidence. FaZe will likely see its common come under sustained pressure towards the beginning of the first quarter of the 2023 calendar year when the share lockup expires and as it executes on its share offering.