Description

Playboy ( PLBY ) is a compelling short at current prices with 50-100% upside on the short over the coming 6-12 months and potentially much sooner, and a low probability of long term impairment of principal.

The company is an American global media and lifestyle company founded by Hugh Hefner to oversee the Playboy magazine and related assets and is in the midst of significant transformation from a company licensing  a well known brand to a more diversified consumer products company. This is a transformation fraught with execution risk, one that will pressure margins, and which logically should de-rate the company materially over time. Currently the company sports a bubble like valuation at 60x trailing ebitda, due in part to two speculative bubble era phenomenon ( SPACs and NFTs) both of which are in the process of deflating. As reality this becomes more apparent the stock can tumble 30-60% from current prices and it would still retain a rich valuation.

To be clear, the core PLBY brand and the licensing revenue (less than $40mm in 2020) generated by it are valuable assets. However, that value represents a small fraction of the current price (~ $320mm at 8x revenue multiple), while the majority of value ascribed (>$1.1B) is primarily linked to the market’s inflated perception of the value of the company’s ability to monetize its IP via Non-Fungible Token (NFT) sales. Over the coming months as investors become aware of the poor health of the NFT market, as well as PLBYs ability monetize its IP the stock should face significant downward pressure.

Over the coming 1-2 years the three drivers of PLBY’s stock price will likely be 1) progress in growing their licensing business 2) success in transforming into a consumer products company and 3) success in monetizing their IP via NFTs.

This report will focus primarily on the NFT opportunity because we believe high expectations in this segment explain the stock’s Meteoric rise ( and overvaluation ) and likely fall once those expectations go unmet. Secondly, we see short term catalysts that should reset inflated expectations in the NFT opportunity. The other drivers will be given less emphasis because they are unlikely to be as meaningful to stock performance in the short term.

With regards to licensing revenue we see it as too small to offset any likely decline in valuation from a disappointment in the NFT business. We view the company’s transformation into a consumer products company as a meaningful intermediate term risk, both because of the execution risk as well as the margin degradation that will ensue.

NFT Primer:

Non-fungible tokens ( NFTs) are essentially digital products minted into a blockchain and governed by a smart contract. There are infinite use cases for NFTs and we believe NFTs will have a very bright future in the coming years and decades. As a blockchain creation NFTs are typically bought and sold with crypto currency with the current primary blockchain for NFTs being the Etherem network. 

Early applications of NFTs have been digital collectibles like digital art, sports cards, Pokémon cards, web 3 domain names, and virtual goods and avatars used in video games and/or for metaverse or other web 3 identities. 

An example of a more functional NFT use case includes converting titles of automobiles into NFTs. Under current practice when a car is totaled the insurance company ships the car to a salvage yard, perhaps owned by Copart ( CPRT ) or IAA. 

Cars tend to sit on those lots for 30-40 days until the physical title is mailed to the insurance company who processes it and then mails it to the salvage auction company who can then auction the car. The costs in terms of land needed to hold the cars, inventory sitting idle, over night mail, and errors are considerable. As an NFT, the title becomes a digital asset that can be seen, verified and transacted on the blockchain in real time. 

In our example the cycle time to bequeath ownership across the salvage value chain could be compressed 90% using the NFT use case, saving time and money for multiple parties. Many other examples including property title, contracts, concert tickets, etc are coming soon. 

NFTs also contain smart contracts which dictate terms of future transactions of the NFT for years and potentially forever. For example, an artist can mint their art digitally as an NFT and dictate in the smart contract that they will receive 10% of any future sale of the NFT on a secondary market. Then, should the NFT resell on a validated exchange, the 10% retrade royalty would upon payment, automatically transfer to the crypto wallet of the artist. 

Smart contracts are a game changer for creators who can create a masterwork ( aka Van Gogh, Warhol, ect ) that sells initially for very little but years or decades later for millions. Baseball cards are similar as are many collectibles, sold once for pennies and years or decades later for thousands or even millions. 

Smart contracts have vast commercial applications that will govern most future transactions. In the event ticketing space smart contracts will enable performance artists and sports owners to capture a portion of tickets sold by scalpers, etc etc. 

NFTs have been around for some years but have exploded in popularity in the past year, and have taken the digital world by storm. On the digital collectibles side there are strong arguments for why NFTs will dominate and expand the market for collectibles. 

Besides the utility of smart contracts described above, collectible marketplaces are now digital, global, transparent ( via the blockchain ) and far more liquid. Social media is allowing collectibles communities to come together to collect, trade, and bond over the products. 

One of the most successful recent examples of NFTs has been the NBA Top Shots marketplace operated by Dapper Labs who licenses top moments (think a Lebron dunk) from the NBA then resells the short clips as digital collectibles ( NFTs) in packs of limited editions to collectors. In less that one year sales of Top Shots have exceeded $500mm and Dapper’s recently raised venture funding at valuation of $7.5B. 

NFTs also soared in stature and popularity in Q1 2021 after an artist that goes by Beeple sold a composite digital art piece, made up of 5,000 days of individual digital art pieces, for $69mm in an online Christies auction. 

One of the primary arguments against NFTs is why would someone pay for digital sports cards or sports moments when they can download or copy them off You Tube for free. The answer is that one can also buy a replica of the Mona Lisa on Amazon for $500 but nobody will be impressed. Just like a Mickey Mantle rookie baseball card which recently sold for $5.2mm has an intrinsic value of a few cents, but is valued by what the marginal buyer will pay for a special and scarce item, so too for NFTs. 

Owning the rights of the digital item as verified on the blockchain bequeaths value to the owner. As recently as a couple months ago Jack Dorsey auctioned off the 1st ever tweet as an NFT for millions and an NFT video of the fugitive Edward Snowden sold for $5mm ... 

Like the early days of many transformative innovations, euphoria for NFTs hit epic proportions in Q1 2021, coinciding with massive crypto speculation and excitement about the future of digital collectibles. While the transformative promise of NFTs is real, prices and enthusiasm were badly overdone. 

Enter PLBY who announced during the height of the NFT euphoria that they will produce NFTs of their iconic images in partnership with Nifty Gateway, which is owned by the Winkelvoss twins of The Social Network fame and now crypto royalty. Nifty is a top tier, curated marketplace for NFTs. 

The hype around the announcement and investor’s enthusiasm for the future value of PLBY NFTs led to a massive re-rating of PLBY stock as investors extrapolated bubble NFT prices with bubble valuations.

In reality PLBY’s ability to create NFTs of its covers and content is somewhat constrained by IP encumbrances and copyright issues. It will be timely and costly to sort out the IP issues which often include multiple rights holders. It appears the intial NFTs will be via a collab with a famous crypto artist. 

Further, the market for NFTs has fallen back down to earth. The crypto crash of May has brought LOW the NFT Market as prices and volumes have dried up. See current article about how the market is down 90% as of last week ( https://www-pymnts-com.cdn.ampproject.org/c/s/www.pymnts.com/cryptocurrency/2021/nft-sales-plummet-90-percent/amp/ ). Many early NFT collectors, including those in Top Shots, have lost enormous sums and demand for many NFTs has dried up.

To be sure, the NFT market is nascent and cyclical and almost certainly will bounce back and top creators will ultimately prosper. Content for iconic athletes and celebrities will ultimately hold value. However, PLBY stock has yet to reflect the realities of the NFT market correction and to the contrary reflects a bubble reality that very likely can never come close to being achieved. 

Also, investors don’t fully understand that margins for NFTs are far lower than typically licenses products reflecting art, production, marketing and marketplace costs. Collabs with top crypto artists can run as high as 50% of revenues, marketplaces like Nifty charge 10-20% of revenues, and other costs can total another 10-20% of revenues, leaving far skinnier margins than investors understand. 

As such, once the PLBY / Nifty collab goes to market, and price ( and profit ) discovery occurs, PLBYs stock should lose much of the NFT driven valuation premium it received from it’s NFT announcement and subsequent run up. 

Risks:

NFT bubble re-inflates 

PLBY NFTs sell for values significantly higher than comparable NFTs 

PLBY grows their licensing business exponentially

Company accelerates and impeccably executes on their consumer goods transformation 

Summary:

PLBY is an overvalued, misunderstood, stock that is poised to de-rate in the short term as exuberance around its NFT prospects fizzles, and in the medium term as its consumer goods transformation strategy, even if successful, leads to margin compression. 

Catalyst

Poor or disappointing results on their intial NFT sales 

NFT market malaise de-rates the company 

Execution snafus and / or margin degradation from the consumer good transformation 

Poorly received acquisition ( as company tried to force growth )