"There is only one valuable thing in art: the thing you cannot explain."
- Georges Braque
Like many children that grew up in the 90s, I collected/played Magic The Gathering. I was introduced to the game by my older brothers and amassed a sizeable card collection.
I still have all those cards today, well all but one that is. Circa 2002 I bought one of my brothers’ entire Magic card lot for $100 when he was looking to make a deal after he ceased play several years prior. One card in that lot was the Volcanic Island.
Just a couple weeks back I sold this card to a local comic book/collectibles store for $450. The market value had gone from ~$400 in December to ~$700 in mid-February. I figured a quick and easy wholesale price deal with a local vendor made more sense than trying to sell myself (plus why give ebay margin vs a small business owner).
The card’s value to me is a memory of my past, a feeling from my youth created when I see/touch the card. Is that worth $450? I don’t know. Evidently no, especially since the other ~1000 cards in my collection give me the same feeling while each only having a market value of $0.01 to $20.
I generally think things have value based on the utility, expected return, or feeling it brings to the owner. But the value of those all change based on who is perceiving them. We try to rationalize why something has the specific value/price it does. But I think it comes down to the fact that the value of anything is what a buyer is willing to pay for it. We should probably focus less on why and more on what is.
Source: mtgprice.com
Back to the Consumer Crypto Grind…
Trading cards and collectibles of all kinds have been hot. That includes physical items like old bubble gum cards, as well as digital ones, like those now minted onto blockchain networks. I am far from an expert in blockchain and crypto currencies, but our team has been diving in recently on Non-Fungible Tokens (NFTs) and the opportunity for various consumer companies to capitalize on a budding market.
What is a Non-Fungible Token? A token is a digital certificate representing another item/asset. We see them used a lot in digital transaction/security applications. In this instance the token is stored securely on a blockchain.
The Non-Fungible aspect, means each token is completely unique and has distinct characteristics. It is not equivalent or interchangeable with another token. NFTs have application to digital art/collectibles since the uniqueness and history of a token representing said digital content can be tracked and verified on the blockchain all the way back to its original creation. It makes verifying digital ownership fast and easily accessible.
Why use NFTs? Well that aligns with the rationale for many blockchain technology applications like cryptocurrencies: Decentralization. Rather than relying on a central authority for verification, tracking, transactions, etc. of a piece of digital content, it can be done directly between the community of buyers and sellers on a peer-to-peer blockchain network.
Decentralization reduces costs and hurdles of operating through a central authority, in this case something like ebay or an auction house. NFT marketplace transaction fees are generally 2.5% to 7.5%, while those traditional centralized providers typically charge 10-20%, in some cases much more.
So with a blockchain NFT you get a secure digital content transaction, fast, with low costs, with the information housed openly on a peer to peer network for anyone to see. However, the reason NFTs are interesting for large content creators/distributors is the unique secondary market opportunity.
The creator(s) of an NFT can add a royalty to it, meaning any time it changes hands, a corresponding percentage fee will be taken from the sale price and given to the NFTs original creator. So instead of a centralized auction house/marketplace taking that extra 10% or so, the artist or content creator gets to see the benefit. The royalty rate is chosen when minting the NFT, typically a range of 2.5% to 20%, but some minting platforms don’t have any royalty limit limits.
There are several of our Long ideas where NFTs are potentially a big opportunity. Two in particular are Playboy (PLBY) and MUDS (Topps). Both have had very successful NFT collaborations launched over the last week and a half. Topps launched NFT cards ahead of the NFL draft with subsequent number 1 pick Trevor Lawrence. The collection, designed by Lawrence’s family members, sold for about $225k. Playboy had its first NFT drop, a collaboration with digital artist Slime Sunday, on Tuesday this week. The collection sold for about $950k, including the feature piece ‘One Satoshi’ selling for $250k. Both collections now have items selling in the secondary market generating royalties.
These are not one offs, and Playboy in particular has nearly 70 years of content within its library it can tap into for future collections/collaborations. Hedgeye Team Retail (McGough, McLean, and Jamison) is hosting a Black Book next Tuesday on PLBY outlining the stock path to $250. The call will be open to our Institutional and Retail Pro subscribers. NFTs aren’t even baked into our model/valuation for PLBY.
Other companies on our long list we think might get into this space include GameStop, Nike, and Adidas. We wouldn’t be surprised to see RH participate in the space as well with its RH Art business. Gamestop isn’t historically a content generator, but you maybe be surprised to know that about half of the NFT market has been in gaming content, and virtual land (otherwise known as Metaverses).
Perhaps Ryan Cohen et al have some kind of plan for an entry into NFT content. For the sneaker companies, digital sneakers have been sold as NFTs by some little-known creators, and Nike filed for a patent called ‘Cryptokicks’ but has yet to reveal what that is. We suspect to see more in the fashion and design realm flocking towards NFTs.
As the chart of the day below shows, (according to nonfungible.com) NFT transaction volume in 2020 was $251mm, that number became $2bn in just 1Q of 2021. With the buzz around the space, it may sound bubbly, and perhaps it is. But we think NFTs have the potential to be a real value-creating channel for consumer content generators for a long time, including for recognizable public companies.
You may think its crazy to pay $500 for a piece of digital content. To that I would say, as a utility focused shopper, it’s just as crazy to pay $300 for a pair of sneakers, or $700 for handbag. Yet people do that all the time and we invest in it. I won’t judge if there is money to be made.
Even if it is a ‘bubble’, our take today is that it is probably going to get a lot bubblier. Those are the bubbles you want to buy.
Who knows, maybe you’ll even see some Hedgeye NFTs on the market someday.
If you would like to learn more about my research team's in-depth investing research please reach out to .
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.55-1.75% (bullish)
UST 2yr Yield 0.15-0.18% (bullish)
SPX 4150-4224 (bullish)
RUT 2 (bullish)
NASDAQ 13,466-14,326 (bullish)
Tech (XLK) 135.47-145.05 (bullish)
Energy (XLE) 48.04-53.60 (bullish)
Financials (XLF) 35.62-37.94 (bullish)
Utilities (XLU) 64.35-67.12 (bearish)
Shanghai Comp 3 (bearish)
Nikkei 281 (bullish)
DAX 147 (bullish)
VIX 15.79-19.87 (bearish)
USD 90.23-91.49 (bearish)
EUR/USD 1.198-1.219 (bullish)
Oil (WTI) 62.80-66.77 (bullish)
Nat Gas 2.81-3.05 (bullish)
Gold 1 (bearish)
Silver 25.88-27.85 (bullish)
Keep your eye on the ball, and finish balanced.
Jeremy McLean
Retail Analyst
