We’re adding The Topps Company (MUDS/TOPP) to our Long Bias list. Topps is one of the most recognizable brand names in collectibles, trading cards, and memorabilia. It’s coming public via SPAC with Mudrick Capital Acquisition Corporation II at a very reasonable announced deal multiple of 12.5x 2021 EBITDA and 1.9x 2021 revenue. The SPAC has done well, with MUDS now trading at $16.13. The company has 4 business units: Physical collectibles at 55% of revenue, Digital collectibles at 6% of revenue, Gift Cards at 4% of revenue, and Confections at 35% of revenue. Confections is a fine ‘staple-like' slow growth cash generator; gift cards a fine high margin side business. The real investment opportunity here is around the collectibles business, and more specifically the rapidly growing digital collectibles market. A market leader in physical collectibles, Topps is innovating in physical collectibles as it grows its ecommerce offering and it continues to expand into new sports/categories with new licenses while also pursing further regional growth. The real Tail opportunity here is in digital collectibles. Digital content affords Topps the opportunity to benefit from the massive secondary collectibles market where it has historically not been able to recognize economic gain, even when much is being generated around Topps products. Digital enables this both through transaction fees for digital content trading on the Topps site/platform, and through royalties on NFTs. The NFT market looks to be in its very early innings, and NFT art and collectibles are showing huge potential. We can’t think of a more relevant and trusted brand to capitalize on NFT collectibles than Topps. It has already executed some notable NFT content, including Garbage Pail Kids cards in 2020, and last week’s Trevor Lawrence NFT cards release which sold for about $225k. There could be a huge Tail market opportunity here, and Topps is likely to be a leading player. Adding to the likelihood of success is the fact that the chairman of the board is none other than former Disney CEO Michael Eisner, who bought Topps in 2007 for $385mm. Eisner knows content and content monetization, and is one of the most well connected executives on the planet.
This isn’t close to Best Idea status yet, and there are a few reasons for that. One is the Trend duration remains a big question mark. There is essentially no quarterly data reported yet, so assessing fundamental rate of change and the comparison set-up is a challenge today. Also, we do know the collectibles market has been hot over the last year, which potentially presents some risk of a cooling off period with a continued reopening of historical consumer wallet share eaters that haven’t been available in the last year. In addition, Topps doesn’t generally own content, it licenses or partners with the content owners to bring collectibles to market. It has very impressive licenses in place… MLB, NHL, UEFA Champions League, Star Wars, Marvel, among others. But continued growth will have to mean winning new relationships while maintaining those already in place. Again, Topps is a brand that content owners should want to partner with, but those deals have to be made. Lastly is the fact that there are many aspects of the NFT colletcibles ecosystem still to play out, which makes modeling Tail earnings challenging given a wide range of outcomes.
We’re continuing the research on this one, but our initial take is net bullish Tail, with Trend fundamentals for the large part unknown. We’ll provide updates on conviction as the research develops and as more data points are released.
