There are sports card collectors and non-sports card collectors. The latter may be more focused on Pokemon or on Magic: The Gathering than they are on baseball and basketball score. There is something very common happening with modern sports cards and many of the non-sports cards: overproduction and potential brand destruction!
The drop in modern era sports cards prices has been known, but what exactly is happening in key non-sports cards? The research team at Bank of America’s Merrill covering Hasbro Inc. (NASDAQ: HAS) has some pretty harsh words. A research report by Elizabeth Suzuki contained a rare double-downgrade and has a summary that will spell this out clearly:
We are downgrading Hasbro to Underperform after conducting a deep dive on the company’s Magic: The Gathering business. Hasbro is overproducing Magic cards which has propped up recent results but is destroying the long-term value of the brand. Card prices are falling, game stores are losing money, collectors are liquidating and large retailers are cutting orders.
Her report shows that Magic: The Gathering accounts for roughly 15% of Hasbro’s revenue and also about 35% of earnings on an EBITDA basis. She further noted:
We’ve spoken with several players, collectors, distributors and local games stores and have become aware of growing frustration. The primary concern is that Hasbro has been overproducing Magic cards which has propped up Hasbro’s recent results but is destroying the long-term value of the brand… Hasbro has kept the growth going with more frequent set releases, more product in each set and wider distribution. Players can’t keep up and are increasingly switching to the “Commander” format which allows older cards to be used.
Here is where collectors needs to pay very close attention. According to BofA’s data, 7 of the last 8 major Magic releases have declined in value. And to make matters worse, Hasbro has continued to reprint its most successful sets — driving prices down further. And the dealers and stores that are carrying Magic have heavy and aged inventory. That means prices may continue to decline.
Another serious issue brought up by BofA is the Magic 30th Anniversary Set. The report said:
We’re also concerned by Hasbro’s decision to release a Magic 30th Anniversary set including four booster packs for $999 (vs. a typical set pack is $5). Not only is the price excessively high, but the set also includes Reserved List cards which Hasbro had promised to never reprint. This has created panic among collectors and we’re seeing collections being liquidated now that the scarcity value of Magic is in question.
Collectors may not care about a stock price for Hasbro, but the pre-report share price was $63.41. BofA’s new Underperform rating is a double-downgrade from “Buy” and the firm’s price objective was slashed to $42.00 from $73.00 in this call. Rather than expecting a little over 10% upside BofA is now forecasting that another one-third Hasbro’s value may be lost.
And the one-day reward for Hasbro shareholders… Hasbro’s stock had lost 8.8% to $57.81 on Monday morning.
Collectors can tell you a few things about scarcity. First off, overproduction sucks for everyone over time. Reprints of prior great cards can only hurt the value of the originals. When the market has more cards than anyone can buy or afford, prices have only one way to go — down!