Updated: Jan 16, 2021
Endor (OTCPK:ENDRF) is a manufacturer of high end sim racing hardware. It has been growing at over 50% CAGR for the last decade and has seen a boost from COVID as sim racing has become more popular and legitimized. As the dominant premium brand, Endor is poised to benefit from the numerous tailwinds that the sim racing industry will have.
Simulation racing is an esport that simulates auto racing. It can be played either solo or against others and one can have a basic set up (all you have is a keyboard/controller) up to a complete rig - cockpit, steering wheel, pedals, gear shifter. Sim racing has become more prevalent as it has transitioned from a niche game to a legitimate esport. Sim racing is the closest a game gets to replicating a real sport with the physics and simulation of it. To highlight this, just last year a sim racer beat a Formula E champion in a real racing event. It would be hard to see this happen in any other sport (NBA 2k player vs. NBA player would be interesting to see). Sim racing has benefited tremendously from COVID as Nascar and F1 have suspended real events and transitioned to sim racing as an outlet. These organizations (whose audience base is primarily older than 50) have also been trying to attract the millennial and gen z generations and sim racing is proving to be a successful avenue.
There are three main players in the sim racing industry. These are Logitech (NASDAQ:LOGI), Guillemot (Thrustmaster), and Endor (Fanatec). Logitech is the low end player and competes with Thrustmaster in this arena. Thrustmaster is another low end player but is transitioning to mid range as Logitech has been compressing its margins. Fanatec is the dominant heavyweight champion in the high end sim racing arena. Its products are superior in almost every way and its products are priced accordingly. Its wheels alone can be priced up to almost $2k, whereas Guillemot's high end products go up to $500, a 4x difference! It is important to understand the difference between regular game controllers vs. sim racing equipment. Regular game controllers are a commoditized product that don't require a high degree of expertise to construct. Sim racing equipment, on the other hand, can be complex products that mimic the equipment that race drivers use in reality and require a high degree of mechanical and electrical fidelity. Below is an example of what one of Endor's high end wheels looks like.
Elements essential to these wheels are mechanical features such as force feedback in wheels which simulates the torque that race drivers actually encounter when driving. Typically, a sim racer will begin with buying an entry level sim wheel from either Logitech or Thrustmaster and if they are serious enough about racing, they will eventually upgrade to Fanatec. This is because it enables a more immersive experience along with slightly better competitive racing times.
Size of the market
The size of the sim racing market is pivotal to evaluating Endor's potential. Unfortunately, this is still a nascent field and there is not clean data that quantifies this for us. We are left to Fermize the possible size. Looking at Guillemot's annual reports, it states that the total number of wheels sold in the US was about 210k in 2018. To extrapolate the global industry size, we used respective countries' esports industry sizes as a proxy for how many wheels are sold outside the US. The esports industry size was about $322mm in the USA in 2018 and about $170 mm in Europe. Using this proportion puts the total number of wheels sold globally (excluding China) around 350k in 2018. Since then, sim racing has doubled (using Endor & Guillemot revenues as another proxy) which would put the total number of wheels to be sold in 2020 at around 700k. In the past four years, cumulatively 1.8 mm wheels were sold. Likely a good portion of these are repeat customers who usually upgrade or replace their wheels once every four years. Adding only the last two years would provide a rough approximation for industry size. The total number of wheels that were sold in 2019 and will be sold in 2020 puts the total industry size of sim racers at over 1mm players. By other estimates, we believe that Endor has about 10% market share by volume and about 35% market share by value. The other 90% of sim racers not using Fanatec should provide a decent growth runway as a portion of them upgrade.
Note: Jeremy Raper has a very insightful/in depth article on Endor and we highly recommend to check it out.
We have jotted some of the business characteristics of Endor below.
Endor is the only pureplay in the sim racing space and is run by a passionate founder (Jackermeier) who owns about 44% of the company. He founded the company in 1997.
Endor has multiple exclusive licenses with racing organizations and car manufacturers solidifying their brand as the premiere sim racing company. Its partners include Nascar, F1, Porsche (OTCPK:POAHF), etc. The vast majority of Endor's sales are DTC enabling better customer support, branding, speed to market, and innovation. Its competitors rely on either wholesaling or selling through e-commerce partners.
Risks and Headwinds
Although gaming is slightly resistant to recessions, Endor is an expensive premium brand and a recession would cause gamers to most likely remain with their equipment for longer, stretching out the upgrade cycle that is inherent to Endor's business.
Endor outsources manufacturing to third-party manufacturers in China and supply chain issues there would hamper its business.
Catalysts and Tailwinds
Continued growth and legitimacy of esports will continue to attract larger audiences.
Virtual Reality and Cloud gaming make sim racing games more immersive and realistic. It also lowers the activation energy needed to play these games for a great experience.
Fanatec should benefit from the Thrustmaster and Logitech user base as they upgrade to Fanatec. This is a 900k user base.
New consoles and racing game releases in late 2020 and early 2021 will be a large tailwind. Although these consoles are backwards compatible and will not be the same revenue boost as other console releases, it should still provide a boost as new gamers join the ecosystem. Endor has an amazing brand (with a loyal customer base) which gives it the added optionality of creating lower end products appealing to a wider user base or adding other accessories to its line (e.g., Apple (NASDAQ:AAPL) and wearables).
Expansion into Asia should provide added growth. The Asian esports market is growing rapidly and is about half the size of the US market. Endor has recently expanded operations (2019) to sell to Asian customers.
Uplisting to the Frankfurt Exchange or US exchanges would be greatly beneficial.
With esports growing rapidly, a large sim racer user base, and multiple catalysts ahead, Endor will likely continue growing at > 20% after 2020. Given its high gross margins (around 50%) and operating leverage, Endor will be making > $20 mm in profit by 2022 (trading at 12x 2022 earnings) and will increase rapidly from there. Given its growth rate and profitability, a DCF gives Endor about a 40% upside from where it is currently.
Sim racing is an industry that is growing very rapidly as it has gained legitimacy and popularity. We do not see this abating as sim racing becomes more immersive aided by technological tailwinds. Endor is the dominant premium brand in this space and is the best poised to take full advantage of this industry growth. Time to strap in.