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A Magical Recovery…Until It Wasn’t (Part 1 of 3)
INTRODUCTION & DISCLAIMER
This article is not meant to be taken as stock advice in any way whatsoever and is being written for entertainment, educational and informational purposes only.
The writer of this article, Brandon James, has no positions in Hasbro, or any other company that may be mentioned in this article, or any subsidiary of Hasbro (or any other company mentioned) and has no plans to initiate any such position within the next thirty days.
As some of you might recall, last year, I took a look at the world of collectibles from an investment standpoint. For the purposes of that page, we took a closer look at Magic: The Gathering; as a result of the Magic 30th Anniversary, ‘Celebration,’ Wizards of the Coast (WotC) and Hasbro faced considerable backlash for, essentially, wanting to charge players $999 (plus taxes and fees) for what amounted to four packs of proxy cards.
In the immediate aftermath, Bank of America downgraded their stock and there was significant player backlash to this decision. Far from being a celebration of a game loved by countless numbers of individuals for thirty years, many players (and others who pay close attention to the Magic world) saw this as a cheap cash grab.
Earlier this year, I took notice of the fact that Hasbro’s stock had done a nosedive, on this page.
In that piece, I reiterated that Magic: The Gathering’s 30th Anniversary was seen as an unmitigated disaster; I also looked at the company’s share price at $47.11 as of the time of writing that piece and concluded that the market had overreacted significantly.
Ultimately, I concluded that just the intellectual property is of such significant value, and that the products they release should continue to do well enough, that there’s virtually no way that Hasbro, as a company, would ever be in any serious trouble. I doubt that they’d ever be in long-term trouble, but certainly, no major trouble in the short-term.
Not only did Hasbro’s stock recover from that $47.11 price per share, but it has since closed as high as $72.92 (September 6, 2023); personally, I’d have been out at a price of $60/share, so I certainly wouldn’t have maximized my gains (which is a very difficult thing to do anyway), but gains of over 27% in a period of a half year are enough to make me extremely happy. In fact, I’d have been able to bail at $60/share after just two months…and that $60+/share was sustained for quite a few months leading into September.
However, as of the time of this writing, Hasbro has dropped back to $50.38/share. If you bought at the price of the March article, and held, you’d have gains, but you wouldn’t even be outpacing a DOW Index fund. As stated, I would have cut and run at $60/share.
With that, we’re going to look at some of the ups and downs that Hasbro, and its share price, and the game of Magic the Gathering itself have had over the last several months. Before we do, however, we should reiterate some important concepts that we explored in our earlier articles.
COLLECTIBLES V. GAME PIECES
One concept that has been driving Rudy of Alpha Investments absolutely bananas for the last several quarters is that Hasbro has been treating Magic: The Gathering cards not as collectibles, but as game pieces.
It’s possible that one would ask, “Well, don’t you use Magic cards to play the game?”
Indeed, you do. Magic cards can certainly be sued as game pieces, but Magic cards are not ONLY game pieces; this is a very important distinction to make.
What is a game piece?
Sticking with Hasbro, let’s say that we go out and buy a physical game of Monopoly. What comes in a Monopoly game? Well, you have the Monopoly board, you have some tokens that represent your place on the board, a couple of dice, Chance cards, Community Chest cards, some houses, hotels, varying denominations of money…and that’s Monopoly!
All of those things are game pieces, but what separates Monopoly game pieces from Magic: The Gathering cards?
Obviously, it’s the fact that Monopoly game pieces have no uniqueness or collectibility whatsoever (entire vintage Monopoly sets aside…which mostly aren’t worth THAT much) and nor are they meant to. If you have a $500 Monopoly bill, for example, that bill only has in-game value. It’s completely worthless outside of the game. You could theoretically try to sell one as a standalone object, but why would anyone ever pay as much as $0.01 for it? There are tens of thousands, if not more, $500 Monopoly bills exactly like that one. It’s not unique; it’s not distinctive; it is absolutely worthless outside of the game and there exists no perceived value on that object.
That’s a game piece.
What makes Magic: The Gathering cards more than just game pieces is the fact that they (and sealed sets) are considered collectible. It’s literally called a, “Collectible Card Game,” some people might call it a, “Trading Card Game,” but that still implies some sort of variable value. What would I ever trade a $500 Monopoly bill for outside of the context of the game itself? A different $500 Monopoly bill?
You will recall the discussion of the Magic: The Gathering ecosystem from the first article:
For that reason, with Magic, you have an ecosystem that works together that even makes long-term investing in Magic: The Gathering possible. It’s true that investors have a place in that ecosystem, but I’m of the position that their place is the least important (ignoring crossover, in that investors are often also collectors and players) and that the people going into the local game stores and buying the newest boxes to play with are the most important part of the ecosystem.
Naturally, I’m going to hold my position that the people in local game stores actually buying cards, for the purpose of playing with them, are the most important aspect of the ecosystem. However, they are not so important as to be considered to the exclusion of all others.
The fact remains that the collectors and the traders are still pretty damn important. While you need to have players to play the game in the first place, collectors and investors are still out there buying sets; if the collectors and the investors stop buying the sets (because they perceive the sets/cards will not gain value over time, or at least maintain their value), then what ends up happening is that you sell fewer sets.
Obviously, you need to have players to be playing the game as your base. It is also these same players who might later buy sealed product to experience drafting a beloved set with their friends all over again, but if the tone you set is that cards are nothing more than game pieces, then you completely alienate the collectors and investors, which means you sell less product.
In theory, you could get more sales from new players than you’d have ever sold to collectors and investors to begin with, but I consider that doubtful for reasons that we will discuss in a bit.
Dual Brain MTG, a smaller Youtuber than Alpha Investments, offers this sub-10 minute video that I think describes the issue pretty well.
Going back to our Monopoly example, I’d be shocked if you could go into very many toy stores and find individual Monopoly currency game pieces on sale. What would these colored slips of paper sell for? A penny apiece? They’re individually worthless.
If you go into a local game store, though this might be decreasingly the case if corrections aren’t made, you’ll find any number of individual Magic: The Gathering cards. The reason why is because the individual cards are perceived as either having value, or having the capacity to increase in value. For example, you could have a card that individually isn’t that great, but suppose that a new Magic set comes out and there’s a card that synergizes well with cards in that old set, now the value of that older card might skyrocket.
Of course, not every individual card is perceived as having much in the way of value. It’s for that reason that many of these Local Game Stores will have sleeve boxes (that’s what I’d call them, anyway) in which you might find cards as low as $0.25.
Even those low value cards have some value; they don’t all have to be hits! If someone is new to the game, then they might go and browse those cheap individual cards just to see what they look like. Experienced players might poke through those boxes just to see if there’s a cheap piece that might slot into their deck well, or better still, some card of value that got put into the $0.25 box by mistake! That probably doesn’t happen very often, but hey, looking’s free.
That’s why overprinting and doing reprints of cards of value is seen as a significant problem. If Hasbro, through WotC, floods the market with reprints of high-value cards, then it dilutes the value of the cards that were already out there. If the cards of value have those values diluted, then both the investor and collector classes of the game lose trust not only that the cards they already have will hold value, but also, that new cards that are perceived as having value (or capacity to gain value) won’t be reprinted to the point of valuelessness.
If you’re like me and don’t play Magic: The Gathering, then you might perceive any given card as having a value of $0.00, which is how much I would pay for one. It’s exactly as we discussed in the first collectibles article:
In the world of economics, more broadly, this concept is known as, “The Scarcity Principle,” which is simply that prices will rise to meet a high demand when supply is low. There is also the question of liquidity, which is how easily a product can be turned into cash, if you are a seller, which is also largely dictated by demand.
Most people opening sealed product are going to want to use that product for the purpose of playing the game. Most people who buy new Magic: The Gathering sets are using them to play the game, so when they open those sealed boxes, those sealed boxes (barring new prints for a re-release) have now been removed from the market. The Scarcity Principle, acting alone, would say that would cause the value of the product to increase provided there is sufficient demand
However, in order for the scarcity principle to work, the item must actually be scarce. $500 bills are not scarce for the game of Monopoly, which is what makes them individually worthless. Would you like some Monopoly $500 bills? Go buy a Monopoly set and you’ll get thirty of them, the same thirty that anyone else who buys a set will get…all of which will be the same as any other.
In the case of Magic, there’s a lot that goes into perception of scarcity, therefore, perception of value. In general terms, older cards (particularly those in great condition) are going to be seen as scarce simply because they are, in fact, few in number. The power of a card can create scarcity; if you have a card that’s one of the best cards in the game, then it’s going to go into a lot of decks, get a lot of play and, over time, there won’t be many of that card in excellent condition. Players might want another copy of that card in good condition or, if they get rid of their Magic cards (for one reason or another) and decide to get back into the game, then they might want that card back.
And, as ever, the only thing that will ever be more important than actual value is the perception of value. Many people have made lots of money because they are able to take advantage of people perceiving value where they couldn’t care less.
WHAT HAS HASBRO DONE WELL?
Crossovers, baby!!!
Technically, WotC brands the crossover product as, “Universes Beyond,” but they’ve had supplemental sets this year with tie-ins to Lord of the Rings, Doctor Who and Jurassic World. Basically, these Universes Beyond have created Magic: The Gathering cards with tie-ins to non-Magic intellectual properties. As I understand it, Jurassic World and Lord of the Rings performed extremely well.
It’s also kind of strange in the sense that these crossovers should be perceived as having collectibility. One could argue that the prime motivator might be to try to draw totally new individuals into Magic: The Gathering, and get them interested in the actual game, but one assumes that there are folks out there who just thought that Lord of the Rings Magic cards were cool, bought them, but didn’t play with them at all because they’re more interested in just having Lord of the Rings memorabilia.
Either way, they sold.
Oh, and Hasbro also did a Magic: The Gathering crossover with the lottery!
Not really.
As part of the Lord of the Rings Universes Beyond, Hasbro printed a one of one special foil card called, ‘The One Ring,’ which Post Malone would later buy for a reported amount between one and two million dollars. If I had to guess, I’d say it was almost definitely more than one million because I recall hearing someone make an open offer of one million for the card prior to the set even releasing.
Naturally, I don’t think it was the goal for Hasbro to create a gambling game, especially since they’ve historically tried to avoid being associated with gambling like the plague. On the other hand, Polygon reported that Lord of the Rings collector boxes, which briefly went for more than $500/box, were selling at more than double the price of a typical Collector Booster Box.
That sure seems like an expensive lottery ticket, to me. Of course, credit where its due, unlike most losing lottery tickets, players would still be opening a box to discover cards of at least non-zero value. As of the time of this writing, other (non-serialized) iterations of The One Ring seem to be selling for, at worst, $32.00/apiece.
The long and short of it is that Universes Beyond has kicked some serious butt in sales and getting people talking about the Magic: The Gathering product.
Monopoly GO has also performed extremely well in its first few months on the market; with the main player acquisition phase basically over, we will have to see how the game does on player retention and garnering continued spend. Fortunately for Hasbro, digital games are extremely high margin.
What else has Hasbro been doing well?
Pretty much nothing. It’s all downhill from here.
WHERE HAS HASBRO NOT DONE WELL?
Everything else has been an absolute disaster.
The first thing that we will note, though it was technically last year, is that Magic: 30th Anniversary did not do particularly well. From the March page:
Interestingly, whilst the sale of 30th Anniversary came to an end, Magic’s Twitter feed did not actually state that the product had sold out. In fact, some outlets described the end of the sale as, “Mysterious,” as Hasbro pulled the plug after only one hour of the product being available on their website.
One would almost certainly assume that Hasbro would have happily announced that the product had sold out of any quantities that were intended to be available directly to the public, but they did not announce any such. Instead, Hasbro (through Magic: The Gathering) simply announced that the sale had ended.
For those reasons, my assumption is that Magic 30th Anniversary did not sell out. Of course, my assumption is based on a little bit more circumstantial evidence than just that.
If we look at Hasbro’s Balance Sheet, for example, we can find that there was a significant increase to the, “Inventory,” line item as we compare 2022 to 2021. Of course, inventory increased by an even greater extent when we compare 2021 to 2020, but production getting back online after the Covid-19 pandemic explains some of that. It’s for the opposite of that reason that inventory on hand decreased from 2019 to 2020.
Of course, I should have mentioned that not ALL of those excess inventories could be attributed to Magic: 30th Anniversary, though certainly some of them were. As has been speculated on various channels and articles, Magic has been overprinting the hell out of sets, in general.
If we return to the scarcity principle, the cards have to be perceived as scarce and finite to be perceived as having long-term value. There’s simply no reason for most people to care about cards, even high-powered cards, that there are thought to be any number of. If they aren’t difficult to acquire, then why would anyone perceive them as valuable?
It would be one thing if Hasbro’s plan was to go full on volume and sell the cards closer to what they cost to print; (the revenue compared to cost of revenue, especially when you can print on that sort of scale, is massive) boxes of cards being substantially cheaper would at least justify getting away from the collector model and moving towards the, ‘Game Piece,’ model, where Magic: The Gathering would usually exist somewhere in the middle of those two extremes.
However, the prices aren’t coming down. In fact, the prices are going to increase as of next year. Why should anyone pay more for a box whose individual components are to be perceived as not as likely to hold value, or better still, potentially have the contents being greater (moneywise) than the sum of the box? You shouldn’t pay more for that. That doesn’t make any sense. If the sum of the contents is going to be worth less, then the whole box should be worth less.
Dual Brain MTG did an excellent job discussing this, so I would reiterate that you should watch the above-linked video. Basically, it works like this:
Hasbro: Sells cards to the distributors.
Distributors: Sell cards to the retailers.
Retailers: Sell cards to collectors, investors and everyday players alike.
When we look at sustainability for the collector and investor groups, perception of value (which is often linked to perception of scarcity) is an extremely important component. It’s also an important component for the Local Game Stores.
INVESTORS AND COLLECTORS
We will start with the collectors and investors.
In order to invest in sealed product, Magic: The Gathering’s investor class is going to want the value of that sealed box, over time, to gradually increase. This is something that will naturally happen due to the perception of scarcity.
However, if you end up printing so many cards that they will never be perceived as scarce, and then dump entire set boxes on the market at substantial discounts (due to overprinting) when sales are not where you want them, then you have created a new price floor for the product.
The biggest problem, of course, is the value of the individual cards.
As I discussed with Paul in the first article:
BRANDON: Speaking of growth, there’s a lot of collection that goes on with sealed boxes and individual cards, so I imagine the inventory I’m looking at on your shelves is not everything that you own; do you invest in any individual cards, getting cards graded or long-term holding of sealed boxes looking to sell for big profits in the future?
PAUL: Yes. Older sealed boxes, definitely. Personally, I don’t get into getting cards graded, you can increase the value of the item itself, but the liquidity drops significantly between something that is non-graded and graded and it becomes a lot harder to sell. It’s sometimes tough to find someone who wants it already graded; there are a significant number of people out there who want to pick up something ungraded to (get it graded), so let them make that decision. That’s my opinion.
BRANDON: Not only that, but part of the sealed product, by definition, is, “You don’t know what’s in there,” right?
PAUL: Exactly; it’s the randomization. It’s the, “Oooohhh, it might be this, it might be that, there might be multiples.”
I remember the first Booster Box I ever bought: Full sealed booster box was from Stronghold (March, 1998) and going, “Ooohhh, I hope I get that Sliver Queen, or, what if I get two Sliver Queens?” There’s a possibility that I could even get as many as four.
With that, while many players might want to pick up sealed boxes in order to do a draft with their friends, another aspect that enables sealed boxes to hold, and ideally gain, value is that the contents are unknown and could potentially be an extremely expensive (or multiple extremely expensive) individual cards that could be in very good shape. In other words, regardless of the price of any sealed box, there exists the possibility that the sum of its parts is greater than the whole.
Everything that Magic has been doing recently, The One Ring aside, has been all but ignoring the secondary market and its importance to the game. If you’re going to try to justify people paying well over a hundred bucks for a box of cards (with contents that might not even help their deck that much, or suit their playstyle), then you at least want those cards to retain value. Why else should someone pay many multiples over what a Monopoly game costs for a box of cards that barely costs more than that to make?
As I said earlier, players will always be the most important component of Magic: The Gathering, but the importance of collectors and investors is still more than nothing. No matter how you cut it, those folks are still buying the product and, at the end of the day, a company really shouldn’t care WHY people are buying something, they should just care THAT they are buying something. I’d also be generally disinclined from attempting to rock the boat of a sustainable ecosystem that took thirty years to build.
THE LOCAL GAME STORES
Part of the secondary market, as we discussed above, is Local Game Stores selling individual cards. Local Game Stores tend to do this for both promotional and profit-related reasons.
Unfortunately, in order for these stores to justify selling individual cards from new sets on an expected cost (how much they’d make selling the box less how much they’d make selling its contents individually) there have to be cards of value in there.
Once again, there’s a reason that no store would ever think about opening a Monopoly game and attempting to sell its individual components; they’re individually worthless and would never be perceived as anything but worthless.
Individual cards having value is also important for churn (my term, but might be used) which helps keep independent local game stores profitable. What do I mean when I say, ‘Churn?’
Basically, ‘Churn,’ is having the opportunity to, essentially, sell the same item at a profit multiple times. The way that local game stores, or any number of other places dealing with similar collectibles (such as comics) accomplish that is by interacting with the secondary market.
In other words, local game stores can buy individual cards, mark those individual cards up, and then resell them. In terms of profit margins, much like GameStop (or any other video game seller) with used games, the margins are much higher than selling the sealed product, at least, compared to selling new sealed product.
In addition to potentially higher margins, there’s also the churn. If you go into a local game store wanting to sell a Fable of the Mirror-Breaker, for example, as of the time of this writing, the buylist price is just over $12. The buylist price is, essentially, selling it to TCGPlayer directly. This card was worth well over $20, but it got banned from the Standard format earlier this year.
Local game stores would likely pay much less for that as an individual card. However, for someone looking to sell their cards, they no longer have to deal with shipping or, compared to selling directly to another person online, having the effective price be what they sold it for less transaction fees and shipping. Selling directly is the easiest way to go, but you do take a haircut on it.
Of course, these local game stores can display that card and will sell it to others at a significant markup compared to what they paid to get it from you. It’s also possible that they will flip that card on one of the available online outlets, and even after paying any associated fees, will profit. That’s perfectly fair as they bought the card from you right away, but having done so, they themselves are now waiting for a buyer.
Having visited a few local game stores just to compare them, I can definitely say that the ones without individual cards seem…well…pretty boring. They’re much less vibrant. They just have Commander Sets, boxes and packs neatly organized and it’s all just really boring. That’s like going shopping for socks. I suppose it might work for some people to go in and just grab the set they want and get out of there, but even I (as someone who has never played the game) looked at all of the individual cards. I almost bought one just because I thought it looked cool.
All of that falls apart if there are no individual cards perceived as having value. In the case of collectible card games, the sum of the parts must stand some chance of being greater than the whole.
With that, when you overprint more than you could ever hope to sell…and then worse still, fire sale them all on Amazon, it just detracts from the perception of value. Not only for that specific product line, but also going forward.
Don’t take my word for it, though. CCG powerhouse, Troll and Toad, has announced that they are going to discontinue buying new Magic: The Gathering sets as of the beginning of 2024; they’re simply not profitable enough. In the meantime, Troll and Toad also says that they will be selling their inventory of individual Magic cards.
Of course, we’ve been talking about overprinting and then dumping products on Amazon for less than the retailers could get them from the distributors for. Paul even speculated that they were sometimes for less than the prices distributors were getting:
BRANDON: What confuses me about the Amazon prices is—if the rumors I’ve seen are true—and I wasn’t able to dig into it as much as I would have liked to, but some of these sales from Wizards direct to consumer have been lower than the local game stores were getting these sets for, right?
PAUL: Yes. In fact, from what I found out, sometimes when they do these, air quotes, “Product dumps,” sometimes the prices they initially put them in for are less than even what the distributors, who buy directly from Wizards, are paying. If that’s the case, then it’s surprising.
The problem with that is that doing so would encourage individuals just to wait for the Amazon fire sale, if they think any such fire sale is going to happen. In fact, if individual consumers would do that, then it actually makes such a fire sale even more likely.
As we will detail in the second part of this series (in another interview with Paul), that can cause local game stores to want to back off of Magic products, as Troll and Toad announced they were doing, because what’s the point in buying them from distributors and trying to sell them at a markup if Hasbro itself is just going to undercut those prices? If this went on in perpetuity, eventually, local game stores, one and all, would absolutely fail and it would just be Hasbro selling consumer direct.
AN EVEN BETTER IDEA
But then, Hasbro had a stroke of absolute genius.
What if…instead of overprinting products such that the local game stores would never order that many boxes from distributors, then undercutting even what the individual stores paid for the boxes from distributors on Amazon after the product didn’t sell enough…
…what if…
What if Hasbro just sold the product on Amazon for less than the local game stores pay before the product even hits the market in the first place!?
If your goal is to tank the distributor/store/customer chain, this would be mustache-twirling levels of evil, but most likely, it was just a stupid mistake that a multi-billion dollar company simply can’t allow to happen.
Here’s Alpha Investments on it.
Evidently, Ravnica Remastered Draft Boxes were briefly being pre-sold on Amazon for $135/box, which as Rudy points out, is less than the wholesale price of the product.
You’re not reading this wrong.
Prior to the product actually being on the market, Hasbro, via Amazon, was selling this draft set for less than local game stores could get it for in the first place. If local game stores sold it at the same price, they would literally lose money. That’s roughly eighty days in advance of it actually hitting the market, by the way.
Could you imagine this in the context of an egg farmer with a grocery store as a customer?
EGG FARMER (TO CUSTOMERS): Hey, come buy some eggs! These are farm-fresh eggs, straight from the source, only $2.00 per dozen!
STORE TO EGG FARMER: Hey, we want 500 dozen of your eggs. What kind of price can you do for us?
EGG FARMER TO STORE: How does $3.00 per dozen sound?
STORE TO EGG FARMER: What? You’re selling them directly to your customers for $2.00. Why would anyone buy them from us? Even ignoring that, we’re wanting to buy 500 dozen of them at once, so certainly that warrants some sort of discount compared to selling them to your customers one dozen at a time.
EGG FARMER TO STORE: It doesn’t. Why should you get to make a profit on my eggs? They’re my eggs. Just buy them for $3.00 and hope people will pay you at least $2.00 for them, instead of coming directly to me.
STORE: Ummm…you don’t know how this works, do you?
THE FALLOUT
We’ve already seen what has happened to the stock price for Hasbro compared to the peak price this year; it’s down more than 30% in just a few months.
In fact, it spent some time below where it was in March. Worse still, it spent a few days priced at sub $45/share, which is even worse than the share price during the beginning stages of the Covid-19 pandemic. You might recall my conclusion in the March article:
I’m sorry, but I just don’t see it. I get that the market is a bit pessimistic, perhaps even a little angry, but you can’t tell me that Hasbro is in a worse position than it was in 2018. Certainly, the tightening discretionary spend that we can see on the horizon is going to hurt a bit, and Hasbro certainly isn’t going to keep everyone that got into (or back into) their most profitable products, but the worst case scenario that I can envision is that they get back to a steady release schedule, and steady revenue stream, from their multitude of loyal Magic players.
I think that we are going to see that going into 2024, which isn’t expected to be a great revenue year. People are drowning in credit card debt at levels previously unseen, and interest rates are high, so I don’t expect 2024 to be a great year for discretionary spending, such as games and collectibles.
At the same time, I’d still maintain that Hasbro is not in worse shape than it was in 2020. Of course, the price per share was much higher in 2018, though I feel like the company is actually in better shape today. I still don’t think it’s a buy at this price, however, as the company might have been overvalued then. I also don’t think 2024 is going to be a great year.
In terms of fallout, well, the company has announced the layoffs of some 1,100 employees. The world is gross, so upon the announcing of these layoffs, the stock popped somewhat.
The company’s revenue numbers last quarter were less than outstanding, but adjusted operating profits were good, so it would seem that they have realized that (between people simply not having the money and the players that Magic 30th Anniversary disenfranchised) the revenues just aren’t coming back for the company. Wizards of the Coast, which is to say Magic, did extremely well…but they also laid some WotC employees off because, well, why not?
It’s definitely a tough break for anyone impacted by these Hasbro layoffs to get the word going into Christmas, but I suppose that Hasbro wanted to signal to investors that they are taking the necessary steps to keep their costs down.
Another change that happened is that Magic decided the Standard format would rotate cards out every three years, as opposed to every two. I would think that might keep strong cards valuable longer as they will remain in one of the formats longer, but we’ll see.
HASBRO’S FINANCIALS
Let’s take a look at Hasbro’s Q3 Earnings Report:
The long and short of it is that Magic: The Gathering mostly kicks ass, digital-only products are pretty good, due to high margins and everything else Hasbro attempts to do sucks. Actually, WotC would probably be doing an even better job running itself if Hasbro would leave them alone.
The company had a decent quarter compared to the third quarter of 2022, in terms of adjusted operating profits, but both net revenues and adjusted operating profits are down year to date.
In 2019, Hasbro added to its Entertainment division by buying a company called Entertainment One, or eONE, for four billion dollars. That investment did so well for them that they announced, in August, that they sold the unit to Lionsgate for 500 million dollars cash and cash equivalents.
This might come as a surprise to some folks, but purchasing something as an investment and then later selling it for 12.5% of what you paid to purchase it is not good. In fact, some might call that a massive f***-up. Let’s be very clear: We’re talking about a company that has a market cap of about seven billion dollars managing to lose 3.5 billion dollars on a single investment.
I think we can expect similar performance in the final quarter, though from what I can tell, Lost Caverns of Ixalan, the most recent Magic set, has been doing pretty well and seems to at least be holding value (so far) on the secondary market. The new set features many cards being played across multiple formats.
For WotC + Digital products, net revenues are up about 40% (compared to Q322) and net profits are basically double what they were. Despite a few mistakes in the Magic world, that wing of Hasbro is basically just killing it overall. Monopoly GO and Magic: The Gathering Arena have been doing extremely well in terms of digital products, which have huge margins on a revenue to cost basis anyway. Monopoly GO is a relatively new digital asset, having just released on April 11, 2023, so we will have to see how that product does in terms of retention and continued spend now that the main acquisition phase is either over or nearly so.
Additionally, the company has been making money (via Wizards of the Coast) due to their intellectual property licensing in the form of returns on a video game called Baldur’s Gate 3, published by Larian Studios. One expects that to fall off eventually, but even then, Magic (as a standalone) seems to be at least holding its own.
As a standalone product, Magic the Gathering Q3 outperformed that of the previous year as the year-to-date revenue numbers show about a 3% increase. Of course, much of that likely comes from the Universes Beyond Lord of the Rings crossover, so it’s difficult to say whether or not they will be able to repeat this success in 2024 (most likely not) as I expect 2024 to be a tougher year for companies engaged in discretionary spend retail.
In terms of the books, Hasbro is sitting both on less cash and less inventory than it was at the same time in 2022. Revenue (for the company, not Magic specifically) is down, but so is the cost of their sales as a percentage of revenue. One would assume that how well they are performing on digital assets and licensing has something to do with that, but beyond that, Magic: The Gathering sets are pretty high margin for them.
HASBRO SUMMARY
Consumer products continues to decline, as one would expect. That doesn’t include anything having to do with WotC, and mostly consists of board games and toys because, of course they are declining! Why wouldn’t they? I actually find it hard to believe anyone still plays physical board games or toys, but overall (across over 100 lines) that remains their revenue leader.
Magic: The Gathering and digital products continue to do well for WotC. Tabletop revenues have increased by about 18%, which was likely helped out a ton by Universes Beyond: Lord of the Rings, which absolutely knocked it out of the park. Magic is still slightly down on year-to-date operating profit, but evidently, Hasbro has decided that some of the 1,100 layoffs should include certain positions at Wizards of the Coast. The third quarter was an excellent quarter for Magic + Digital, but apparently Hasbro thinks some cost cutting can be done.
It’s also quite likely that Hasbro is expecting a difficult market for discretionary spending as we go into 2024. In addition, it’s difficult to imagine that any Universes Beyond will capture the public’s attention quite like Lord of the Rings did; that’s just a massive crossover, but I barely pay any attention to entertainment, so I don’t know what the market will respond favorably to.
In any event, 2024 Universes Beyond, according to Draftsim, might feature Fallout and Assassin’s Creed. I understand both of those things are popular video game franchises, but I don’t know that they might get as much attention as something like a Lord of the Rings crossover. It would seem to me that anyone with an interest in video game properties is already well aware of Magic: The Gathering and would be at least somewhat likely to already be enfranchised with the Magic product, if they were ever going to be.
I’ll admit that I could be dead wrong on that. It just seems to me that targeting Lord of the Rings fans is targeting more people who might not already be, at least, passingly familiar with Magic. It looks like a Universes Beyond crossover with Final Fantasy might be in the works for 2025, so I would expect that (even though it’s still a video game franchise and people who love it should still already be familiar with Magic) to be HUGE!
The difference with Final Fantasy, in my opinion, is that you’re looking at an intellectual property that’s actually older than Magic: The Gathering, though not by much. This property has spanned many smash hit games in its mainline (as well as a few very successful spinoffs) and also has a massively popular series of remakes of what many people consider to be its best game of all-time, Final Fantasy VII.
Maybe it’s bias, but I love everything about this. I don’t care if Final Fantasy players already know what Magic: The Gathering is. You put Cloud Strife and Tifa Lockhart (and her massive t***) on a Magic: The Gathering card and you serialize that s*** because that is just a money printer!!! This is going to be positively gangbusters!!! If you made them planeswalkers (a Magic card type) you could give the planeswalker ‘abilities’ the same names as their Limit Breaks in the game.
I guess Lord of the Rings’ first movie came out in 2001? I don’t know. I’ve never seen any of them and also don’t care at all.
But, Final Fantasy? That’s what’s up. If Hasbro wants record revenues, then they should release that next year, instead. Kefka? Sephiroth? Aeris? Cecil? Yuna? Hell, even the most annoying protagonist in Final Fantasy history, Squall Leonhart. THE ESPERS AND SUMMONS!!!??? Holy crap! Not only is it an amazing intellectual property with many well-deserved fans, but it also makes sense as a Magic product. Can you imagine? I don’t know the game, so I’m not even fit to speculate on card design…but it just fits. How is there not a standalone Final Fantasy collectible card game already?
I guess they (Square Enix) tried it, but everyone thought the game sucked. The good news is that WotC has a game that everyone thinks is awesome, so this is just going to be insane.
We have to get through 2024 first.
IN HASBRO’S DEFENSE
It’s finally time to be fair about what Hasbro could, or couldn’t control and also to address what they appear to be doing to navigate upcoming years. I’m going to do this in list form.
1.) Entertainment One
Hasbro is not going to continue to sit on an operating outlet that has become toxic for them and is simply divesting it for what they can get for it. While effectively losing 3.5B on a 4B dollar purchase is objectively awful, it would be unfair not to point out some of the things that they couldn’t control.
- First of all, Hasbro couldn’t control the Covid-19 shutdowns, which would have halted any production that Entertainment One might have otherwise done for some period of time. Essentially, the company wanted to dabble in other forms of entertainment, but that entire wing of the company was essentially halted completely, for several months, not even a year after they acquired it. The timing of the purchase ended up being the worst possible thing that could have happened to them, but at the time, they couldn’t have known that.
- Secondly, you had the writers’ strikes and SAG strikes, which again, briefly halted production in all things entertainment. Additionally, in terms of movies, while the average production is actually doing better for box office releases, neither the number of releases or total box office spend has recovered to anything close to pre-pandemic levels.
With that, I wouldn’t be inclined to give Hasbro a total pass for making an investment that they never should have made and getting into a market category in which they have very close to zero experience, but it does have to be recognized that the timing of that decision couldn’t possibly have been worse and involved factors that nobody could have foreseen.
2.) Return to What They Know
In the quarterly call, CEO Chris Cocks as much as stated that Hasbro, as a whole, is going to return to, and focus exclusively on, the things that they already do quite well. In terms of Consumer Products, that mostly means toys and games. For the Wizards of the Coast + Digital Products realm, that basically means staying the course…aside from not overprinting cards and ignoring the importance of the secondary (investors + collectors) market.
3.) Cost and Inventory Cutting
The additional 1,100 layoffs (in addition to the 800 that had been announced earlier this year) is extremely tough for those folks affected and my heart goes out to them, but Hasbro does have to prepare to weather what’s going to be at least a minor storm in the discretionary spending categories. The next few years might not be brutal in those sectors, but they will be tough.
Some people are confused why any of these layoffs are taking place at Wizards of the Coast, or more to the point, Magic: The Gathering specifically, but just because that wing of Hasbro is doing extremely well does not mean that there are not redundant employees. More than that, when it comes to digital assets (that are already released and live) there are probably developers and programmers that are, simply, no longer needed.
Hasbro maintains that they are on pace to reduce their inventory levels to the desired point earlier than expected. I think that’s a positive development and the only thing better would be not to manufacture excess inventory in the first place. Either way, when a company is sitting on a ton of inventory, it’s not as if there is zero cost basis for that beyond production. You have warehousing and staffing to be worried about, so excess inventory is basically just inefficient and burns money.
4.) Consumer Products Market Share
This goes along with the cost and inventory cutting point, but Hasbro points out that their market share in Consumer Products (traditional toys and games) is growing, despite the fact that revenues are decreasing in those categories.
Hasbro is planning to take a more streamlined approach in this category, which includes better inventory management.
In general, Hasbro seems not to deny that Consumer Products is a market segment that is never going to get back to what it was in previous years. As consumer wants increasingly transition to digital games and products, other than certain electronics, there simply isn’t going to be much demand for traditional toys and games.
In the meantime, it seems that they are generally managing these headwinds somewhat well. While the market for their traditional Consumer Products continues to decline, (as has the operating profit for 2023 compared to 2022, year-to-dates) they’re still managing to at least HAVE operating profits, which is certainly better than losing money just on existing.
THE NEXT FEW YEARS
In terms of discretionary traditional Consumer Products, it seems that Hasbro continues to gain market share of an ever-dwindling category. It can’t be ignored that having 100% market share wouldn’t accomplish anything if there’s barely a market that even exists, but we’re a long way from that.
In the meantime, Hasbro is poised to continue to, ‘Trim the fat,’ both in terms of workforce and inventories, so that they can continue to produce operating profits in that category.
It’s going to be a long and winding road, but one that they should be able to navigate. CEO, Chris Cocks, seems to have a better understanding of broader market trends and is preparing for the next couple of years to have continued declining revenues.
As far as Magic: The Gathering is concerned, my opinion is that Wizards of the Coast can basically just stay the course. The Lord of the Rings set absolutely cleaned up for them, but they’re going to face the same market conditions that the rest of Hasbro (and anyone else involved in discretionary retail) will face, so there’s no way that I expect next year not to show a revenue decline relative to this year.
One thing that might be helpful for Magic: The Gathering is that it looks like they’re going to splash around with serialized cards with the upcoming Ravnica Remastered Collectors Boxes, according to Star City Games. In our first conversation, Paul and I touched on that last year:
A recent development that might be a boon to individual card investors is that of serialized cards, which is an excellent concept that has also been seen in the world of collecting sports cards. Magic is recently dappling in the idea, so I got Paul’s take on those:
BRANDON: In terms of serialized cards, which I think a lot of other TCG’s have already done, certainly sports cards have done it in the past.
PAUL: Sports cards have definitely done it. In fact, as an autograph collector, I’ve seen a lot of numbered serialized autographs where, at a certain signing, he only signed 500 and numbered them, “1 of 500,” “2 of 500…”
BRANDON: Oh, wow! He must have got a pretty good cut from Topps or Fleer or Donruss, whoever it was, right?
PAUL: Oh yeah. Those always command a premium. Because, once again, it’s harder to fake that.
With that, it would appear to me that serialized cards might seem to fall somewhere between other cards and sealed boxes in the hierarchy of, “Safe,” investments.
What does a serialized card do for me? Well, it’s the perception of value that matters and serialized cards create, not only the perception of scarcity, but actual scarcity. I don’t think a serialized Magic: The Gathering card is worth more, on a personal level, than a non-serialized one, but that’s because I don’t play the game and all cards are worth nothing to me.
However, when it comes to the Collector class in Magic, those folks are going to LOVE serialized cards, at least, some percentage of them will.
When I say that it creates actual scarcity, it’s important to understand that you simply can’t have more than one card that declares itself, “#1 of 500,” or whatever the case. Perhaps people will also target other numbers, such as, “#500 of #500,” but regardless of the specific number, there are still only 500 of these serialized cards anywhere in the world.
That could also help sealed boxes retain, and grow, in value. If all of the Magic: The Gathering Ravnica Remastered Collectors Boxes hit the market, some of which will be opened and not all of the serialized cards are discovered, then that means some of them must be in the unopened boxes. Even on the secondary market, collectors wanting to target the serialized cards, especially as the sealed boxes become more scarce, are likely to be willing to pay a premium.
In addition to the scarcity principle, Paul also touched on the fact that serialized cards simply can’t be faked, and if anyone tries, they are likely to be exposed:
BRANDON: Hell, let’s make it four. Four proxy packs for $1,000, four measures for $1,000.
Let’s flip the topic to new Magic the Gathering products that do seem to be well-received, such as serialized cards. It seems, to me, that serialized cards—when we look at the hierarchy of the base Magic consumer being a player, then collector, then investor…it seems this is something that can be a boon for both collectors and investors as long as we don’t turn around one day and see two different physical cards that are both, “#5 of 500,” right?
PAUL: Yeah. It’s also something else we talked about, illegitimate companies making fake cards, and if they try to make fake serialized cards they might even be passable, might look close enough without too much scrutiny, it’s going to put a brighter light on those people who are making the passable fakes. The ones who, in my opinion, are really endangering the IP of the industry and are probably more dangerous than overprinting.
It’s also important to add that serialized versions of cards can’t be reprinted (at least not in a serialized way) down the line. Again, you can’t have multiple of a card that says it’s #2 of 500, or whatever the case. Beyond that, you can’t add another five hundred and have a card that says it’s #2 of 500 when it’s actually #2 of 1,000, or that totally invalidates the reason you made a serialized card in the first place.
In any event, I expect more serialized cards to create a stronger perception of scarcity, therefore value, which will create initial interest and also benefit the secondary market down the line.
CONCLUSION
In conclusion, I’d reiterate my position from March that I don’t believe Hasbro is in any serious trouble, at least, not imminently. They are going to have to navigate a few tough years as I would expect Discretionary Consumer spending to decline as people are drowning in credit card debt and simply aren’t going to have the money to spend.
In terms of outstanding credit cards debts and balances, according to Lending Tree, we soar, as eagles, ever skyward and create new records with each passing day, but I think a lot of that is people having trouble keeping up with the interest as opposed to actual additional spending.
It’s like Rudy from Alpha Investment said, “Easy mode is over.” The government dumped its free money on everyone, we had runaway inflation as a result and investing in literally anything (in the first few months of the pandemic) probably brought massive returns as the market was way more pessimistic than could ever be justified. We had our artificial low and then got really high, but now it’s time to come down; the only question is whether it will be a slow come down or a sudden one.
In terms of my position on Hasbro stock, I don’t think it’s a buy right now. That’s not to say that I expect the share price to decline to Covid levels again (I don’t), but it has shown that it can decline to that extent and also behaves with way too much volatility for my liking.
As you can tell from my March article, I thought the initial share price decline was unjustified and expected a spike, which did, in fact, happen, but I also thought it was a decent long-term pick at that price. At this point, I’d want to hang back and see how they navigate the declining revenues in Consumer Products that are sure to continue and see if they can still operate profitably in that sector; there’s no doubt Wizards of the Coast will operate profitably, but unless the Consumer Products unit can demonstrate that they can stay at least even in the face of declining revenues, then WotC + Digital is simply not big enough to save the entire company by itself.
More than that, I’m not especially excited about what’s coming in Universes Beyond next year as I don’t think those sets will be as gangbusters as Lord of the Rings was. I see no reason whatsoever that short-term excitement would cause the company’s share price to pop over $63/share anytime in the near future, so without that sort of quick profit potential, I’m not interested in it at this price. I’m also not convinced it’s a great long-term investment at this price because the company has said that revenues in Consumer Products have no hope of getting to where they were, so they’re just trying to navigate ever-decreasing revenues in a profitable way.
If I were interested in making a play, I’m going to be fixated on Hasbro’s quarterly reports and making sure that they’re showing an overall adjusted operating profit every single quarter. If Consumer Products shows an adjusted operating loss, then that loss needs to be extremely small and would only be acceptable in the first quarter.
Capital Research took a more aggressive position in Hasbro just over the $45/share mark and that’s about where I would set my target if you wanted to buy. You’ll just want to make sure everything in the paragraph immediately above remains true. You might need a strong stomach if you do as Hasbro has shown it can dip below that $45, from time-to-time, and the next couple of years are going to be worse (for revenues) than this one was.
Intermediate to Long-Term: I like it at $45, but you might be holding it for a while. Make sure to bring your barf bag; you might need it, from time to time.
Short-Term: I hate it at any price right now. If you pay attention and get information when the Final Fantasy Universes Beyond is going to release, then you could probably buy Hasbro at any reasonable price roughly a month in advance of that and all of the hype from that set (not to mention the sales) should generate a pretty nice short-term pop.