First Look: FaZe Holdings

First Look: FaZe Holdings

FaZe Holdings is likely one of the most unique public companies I’ve come across in my time as an analyst. In trying to place it in a box that is somewhat recognizable, I’ve compared it to a Gen-Z talent agency, but that does little to fully encapsulate the complexity of the business. You could just as easily call it anything from a sports franchise to a marketing business. From humble origins, it has become one of the most recognized names in sports — yes, all of sports — and has an unrivaled reach in the highly-valuable younger demographics.

Originating from a team of teens posting clips of themselves playing games such as ‘Call Of Duty’ and ‘Counter-Strike’ on YouTube, the company is deeply entrenched in gaming culture. As its creators grew in popularity, money started rolling in, initially directly from YouTube in the form of monetization of its videos, but this would branch out further, most pertinently into esports. 

For those still a little lost, esports is essentially competitive gaming and is wildly popular — much more popular than you’d think. The global esports market is valued at just over $1 billion and is growing fast. The majority of this comes from sponsorship, with other revenue streams coming from media and streaming rights, merchandise, and ticket sales. There’s also big prize money up for grabs. The top-earning esports player as of July 2022 is Johan Sundstein — AKA "N0tail". He's made a total of $7 million to date.

Now on to FaZe Holdings, or FaZe Clan as it is better known. While its roots are in gaming and esports, it is on a much more ambitious mission than just that. It describes itself as a digitally native lifestyle brand for gaming and youth culture. It has some serious reach, with over 500 million followers across social platforms globally, delivering a wide variety of content spanning video blogs, lifestyle and branded content, gaming highlights, and live streams of esports tournaments. 

Back in its early days, it was an LLC being run by a group of teenagers and a PayPal account, but the company has brought in some more experience to take the reins and run it as a proper business. Lee Trink is the former CEO of Capitol Records and was running his own talent agency when he stumbled across esports. After reading an article about a League of Legends tournament with viewership almost rivaling the Super Bowl, he knew he needed to get a piece of the action. Bringing in his experience of the music and talent industries has gone a long way to turning FaZe Clan into a more focused enterprise. 

That being said, its business model is still fairly opaque. It takes in revenue from a number of different streams. The main source comes in the form of brand sponsorships, followed by esports prize money, as well as merchandise and content monetization. It all sounds fairly wishy-washy, and that’s because it is. 

Here are a few business highlights outlined by management from its most recent quarter:

  • Launched "FaZe Subs" ghost kitchen brand in partnership with DoorDash
  • Welcomed new members FaZe Deestroying, FaZe Ronaldo, FaZe Proze and FaZe Shanks to FaZe Clan; their combined total social media following exceeds 18 million
  • Introduced FaZe Clan Buffalo Chicken flavor Pizza Rolls with Totino's
  • Released merchandise collaborations with Naruto Shippuden and Lyrical Lemonade

Not exactly the recurring revenue model you’d like to see, is it? 

That being said, it has also penned deals with Disney, McDonald's, and the NFL, so there’s clearly something here. I’m just not exactly sure what it is. 

FaZe seems to be at this inflection point where it’s thinking, “we’ve done the hard part, we get 100s of millions of eyeballs, we have this incredibly strong brand recognition in a notoriously hard-to-access demographic, companies would kill for our position right now. But now what? How do we make money from it?” 

And it’s still trying to figure this part out. Esports prize money isn’t the reliable income you would expect for a billion-dollar public company. Pivoting into brand and sponsorship deals could well bear fruit eventually and is likely the main focus of the business moving forward. Yet, again, I’d question just how reliable a source of revenue it really is — especially considering the reputational risk a cadre of young influencers can bring to the table.

A number of FaZe clan members have been banned for using racist language on their streams. Last year, the company was also caught up in a crypto pump and dump scheme in which a number of members pumped an altcoin called Save The Kids. This is not the only pump and dump scheme attributed to FaZe Clan members either, with FaZe Banks — a prominent member — also pumping a coin called BankSocial last year. It’s also had a bunch of other legal issues. Ex-member Tfue — a professional Fortnite player — sued the company in 2020, claiming that FaZe contracts were exploiting its creators. Another influencer, Alissa Violet, also sued the company over some dodgy dealings with her own company, Clout Gang. 

All of this culminates into a bit of a peculiarity for me. For one, it seems its recent SPAC, in which it raised $60 million, was very premature. The company took in $52 million in revenue in 2021 on a net loss of $37 million. At a valuation of $1.1 billion, those numbers look incredibly weak. Combined with the uncertainty of its business model, its sordid history of scandals and legal troubles, and the fact that it is still very much finding its feet as a business, mean it’s not a stock worth considering anytime soon. 

And yet, I can’t help but feel it would be folly to dismiss this out of hand just yet. The company is clearly entrenched in Gen-Z culture, something I know far too little about. While I have no interest in investing in FaZe, it is a business I will keep my eye on in the future, whether out of morbid curiosity or to see if it can eventually utilize its standing amongst the younger generations into a viable business.

MikeMike

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