Hasbro Doesn’t Seem To Care About Its Most Important Customers

Investment thesis

Hasbro (NASDAQ:HAS) owns Magic: The Gathering, the biggest trading card game. It seems that management doesn’t understand the significant long-term impact of their decisions on the player and collector community. The market gets flooded with new products every year, there are countless variants of each card, special products are ridiculously expensive, modern cards are a massive money destroyer, and customers these days are price sensitive. Considering all this, the uncertainties for investing or staying invested in Hasbro are too big.

Motivation for this article

Magic: The Gathering “MtG” was an important part of my childhood. It was fun to play and more importantly for me to collect cards. Even today, 25 years later, I am still a collector of vintage Magic cards and old sealed products.

Wizards of the Coast “WotC” started the trading card business almost 30 years ago and the company was later acquired by Hasbro in 1999. The game saw a boom until the end of the 90s and some dark years after 2000 followed. Magic recovered and new highs in terms of players and revenues were reached. Recently, however, it has become increasingly clear to the community that Hasbro is only concerned with maximizing profits. That shouldn’t be a surprise for a stock company but excellent management is able to find a good balance between short-term profits and long-term growth. An engaged, loyal player and collector community is the key success factor for this business. Looking at Hasbro’s strategy and latest product releases, I am afraid that its management doesn’t understand this aspect or they simply don’t care. Both is extremely concerning for the long-term.

Why is Magic so important for Hasbro?

The company reports results in three segments: Consumer Products, Wizards and Digital Gaming, and Entertainment. For the first nine months of 2022, Wizards and Gaming contributed 24% to the total net revenue. In FY2021 it was 20% and the management stated that WotC topped $1B in revenue, doubling revenue two years ahead of target.

24% is a significant revenue share, however, looking at the segment’s adjusted operating profit contribution, it becomes clear why Wizards and the Magic: The Gathering business is so important.

Two-thirds of adjusted operating profit is generated from only 24% of net revenue. The operating margin for the Wizards business is 44%, the other two segments are not even close, lifting the company’s overall margin to 15.6%. Hasbro literally prints money (on cardboard). There is absolutely no doubt that the Wizards & Digital Gaming business is the most important operation.

What’s going wrong?

Just to be clear, this is my personal opinion.

First, Hasbro is flooding the market with new releases. I don’t want to go into too many details here but in the past, there were only four to five bigger expansions of the game per year (and some really minor stuff). Today players and collectors face several expansions, different card versions, promos, Secret Lair, Commander, Masters, and so on. It makes it very hard for the community to enjoy the latest cards and to build a relationship with them. The next release is already waiting. That’s a big problem because the game lives on the nostalgia that people associate with it.

Second, there are so many versions of the same card and that makes it very hard for collectors. In the beginning, there was only one version of a card and that’s it. A few years later a foil version was introduced. Today you get the same card with different artworks as standard, foil, borderless, etched foil, textured foil, and so on. That’s crazy but definitely not the end. What’s really special and is it worth collecting?

Third, Magic: The Gathering was always an expensive hobby. I don’t blame Hasbro for normal price increases. You can’t expect the same product to cost the same price 10 years later. The problem is the crazy expensive releases where Hasbro has lost all connection to reality. Magic’s 30^th Anniversary edition could have been a great reward for the loyal players, instead, they are asking $999, without taxes and shipment, for four boosters. We are talking about 60 cards, proxies that cannot be played at tournaments. That’s insane and the feedback from the community was accordingly.

Fourth, buying modern Magic cards is a massive value destruction. You are burning money. Powerful cards that are not on the reserved list (these old cards from the origins are protected from reprints) get reprinted to death. Your $100 card can drop overnight to $20 after the first spoilers of the new set and most of them will never recover. It’s hard for novice players who spent thousands of dollars, realizing that they only get 5-10% back a few years later when trying to sell their modern collection. Hasbro should think about a careful reserved list expansion to preserve the value of cards. This would enable new players to create a valuable collection over time.

Last but not least, inflation is sky-high, consumer savings erode and therefore many people have higher priorities than cardboard these days. We talked about the crazy prices for some of the Magic products. When you have to decide between rent, food, and cards, for most of us it is clear what to do. Yes, customers are getting price sensitive.

Hasbro is doing everything to increase short-term revenues and profits for its stakeholders. However, I am not sure if they carefully thought about the long-term consequences for the game. MtG is the biggest trading card game but there are new competitors like Flesh & Blood (first release in 2019) that compete for players and collectors. Considering all this, the uncertainties are too big and there are much more attractive investment opportunities even in the toy/game industry. I am going to write an article about this in the near future. I rate Hasbro a SELL.

Conclusion

It seems that Hasbro doesn’t understand the significant long-term impact of their decisions on the Magic player and collector community. This is a prime example of short-term revenue and profit interests over long-term success. “Magic is on track to be Hasbro’s first $1B brand”, no matter what it takes. The market gets flooded with new products every year, there are countless variants of each card, special products are ridiculously expensive, modern cards are a massive money destroyer, and customers these days are price sensitive.

Considering all this, the uncertainties are too big and there are much more attractive investment opportunities these days. I rate Hasbro a SELL.