The Investing Case for Hasbro From a D&D Nerd
With the acquisition of D&D beyond, last year’s appointment of Chris Cocks as CEO, the announcement of One D&D and a potential spinoff of the entertainment segment, I believe Hasbro to be a compelling buy at current prices with fairly limited downside and significant upside with optionality. I’m not going to bother with a long detailed analysis of the history, details, prior failures and attractiveness of the business as it currently stands, as anyone who wants that can just read the Alta Fox Capital presentation as it would almost certainly be higher quality analysis than anything that I could do.
(https://studylib.net/doc/25768940/alta-fox-has-presentation-final). However I believe there are some recent developments that haven’t been discussed enough that take it from just a solid low risk decent reward proposition to a highly asymmetrical bet with significant optionality. Therefore this will be a more qualitative analysis of why I think we could see accelerated, high margin growth in the long term that isn’t currently considered in the share price.
The first thing to establish is that the underlying is quite attractive. You’ve got a classic high quality business hidden within a lower quality one with Wizard of the Coasts and their consumer products segments respectably. Despite only making up 18% of revenues, WoTC makes up the majority of the operating profit, with the small entertainment segment just breaking even and the consumer products segment being profitable only two quarters of the year. In spite of this the high quality WotC assets have been somewhat neglected and mismanaged over the past 5 years, failing to capitalise on their full potential. A core element of upside in Hasbro revolves around last year's appointment of WotC president Chris Cocks as there has been a focus shift to the WotC assets that has already begun. While Magic the Gathering is the big earner amongst them (at $1b of revenue a year) and continues to perform strongly I will be focusing on the huge potential I believe there is in Dungeons and Dragons, which currently only contributes around $300m of revenue.
To understand both the underinvestment and potential for D&D you need to understand the playerbase. I should note that much of this analysis comes anecdotally from personal experience as an avid D&D player along with actively following the community, which is where I believe the edge vs the market comes from here. It is difficult to play D&D casually in the same way as other games as sessions take up a significant amount of time, along with significant planning and work outside them (especially from dungeon masters). The D&D player base, while smaller than Magic (14m estimated vs 40m) invests huge amounts of time, energy and money into the game. However, as it stands the game is fragmented, with most players utilising a variety of online tools for specific tasks such as character creation (D&D Beyond), map building (Inkarnate) and designing mini’s (Heroforge) along with various other things. This looks like it may be about to change after Hasbro acquired probably the most central D&D platform D&D Beyond in May, followed up with the announcement of One D&D in August. Prior to this acquisition, Hasbro essentially didn’t have any official online D&D products, just collecting royalties from D&D Beyond while not receiving anything from many of the other services. Furthermore, there was no integration between the physical and digital which meant for example, that players who purchased physical D&D books wouldn’t be able to access them in character creation in D&D Beyond and vice versa, making the purchase of either (but especially the physical book where Hasbro made the majority of the money) harder to justify as a player.
One D&D is essentially the next release of D&D and encompasses both a wide variety of rule changes along with indications of some future products that may be released. Immediately the ability to access purchased books in digital character creation is huge and should provide a significant boost to sales as it makes physical books much more attractive. The real potential however comes from the new digital tools being previewed such as map builders, pre-built encounters for pre-made campaigns, minifigure designers and digital playspaces. The idea is for everything D&D players might want to play to be on the one platform and interconnected. In comparison to products that already exist Hasbro has far more money to invest in building these tools along with the significant potential for interconnectivity that doesn’t currently exist in the space (eg. create a map, build characters and minifigures to go with them, search both homebrewed and official monsters for players to fight, import them all to play in the digital playspace). The value proposition for players investing into any of these digital tools is now significantly larger and speaking anecdotally I (and many players I know) are extremely interested in seeing the offerings and putting some money towards them (I’ve never bought a D&D product before). While this will likely require significant capex up front, I believe this will yield significant, high margin sales growth that should substantially boost the bottom line. This improvement in monetisation will likely coincide with the increase in attention that’s come from the pandemic and media such as Stranger Things (which inspired a 600% increase in searches for D&D) and the Dungeons and Dragons movie which has provided a tailwind for D&D’s already solid organic growth. It’s impossible to forecast specific financials (partially why this opportunity exists) but with steadily increasing players and what I believe will be a significant increase in revenue per player it’s not hard to envision revenue increasing by many multiples of its current $200m contribution to Hasbro over a 3-5 year time frame. D&D revenue growth has slowed significantly in the past year (after a pandemic pull forwards) and with it being much smaller than Magic I don’t believe it’s considered a significant factor in Hasbro’s valuation from the market. With the potential revenue added being high margin I believe this increase would be significantly accretive to the bottom line and with an undemanding 20 P/E offers significant upside.
Interestingly, I don’t currently own Hasbro as I think there are short term headwinds to the stock that may provide a more suitable buying opportunity. In the past year inventory has expanded significantly from the historical average similarly to what we’ve seen across the retail industry. As Hasbro works through this inventory it could put significant short term downward pressure on margins similar to what we’ve seen in other retailers such as Target. Furthermore, much of the crux of this thesis (One D&D) isn’t scheduled to officially launch until 2024. Therefore, while I believe Hasbro to be compelling at its current price, my recommendation would be to add it to your watch list and look to enter as potential inventory issues flow through to earnings, and add in size on thesis confirming information related to the successful development of One D&D.