May 6, 2022
Spin Master Corp. Highlights from 2022 Investor Day
Our view: At its virtual Investor Day, Spin Master Corp. ("Spin Master") highlighted the growth opportunities across its Toys, Entertainment, and Digital Games segments. Overall, we were encouraged by the content/ product pipeline and strategy laid out by the company. Following the better-than-expected Q1 results and upward guidance revision, as well as the runway ahead for each of the 3 segments (as highlighted during the Investor Day), we see a significant opportunity in Spin Master's shares at current levels. Reiterating our $65 target and Outperform rating.
Key points:
Digital Games: runway cleared for takeoff – Spin Master's Digital Games segment offers a meaningful runway for high margin growth over the coming years, which we believe should be increasingly reflected in the company's valuation. Revenue for this segment has been growing at rates well above the company's total average, and these revenues have been very margin accretive. While this is a highly competitive space, some of the company's developed apps/games through this platform will be based on Spin Master's own entertainment/IP going forward. The company generates revenue in this business through subscriptions (e.g., Sago Mini) and in-app purchases (e.g., Toca Life). We were encouraged by the "stickiness" highlighted in both of these models (i.e., 70MM+ MAUs in the Toca ecosystem) and believe the current pace of growth should be sustainable for the foreseeable future. There was an expectation that the pace of revenue growth could moderate following the "peak pandemic" backdrop (when kids were stuck at home), but that moderation does not appear to have materialized. Management is targeting Digital Games revenue mix to account for 20% of total revenue over time.
Entertainment: a lean, mean, content machine – The Entertainment segment not only generates direct revenue, but it also serves as a catalyst for Spin Master's other two business lines (Toys/Digital Games). While the nature of this business line could lead to some variation in revenue growth rates over time (i.e., significant growth following major content releases, followed by some moderation), it is highly margin accretive (given that recurring costs are relatively low after upfront investments in content development; e.g., Q1/22 EBIT margin of ~51%). Given the pipeline of opportunities/release plans highlighted at the investor event, we believe this platform is well positioned for continued growth/expansion. Some examples of future releases include a 2023 PAW Patrol spin-off, a second PAW Patrol movie (also in 2023), and a series targeting "older" children later this year (outside the company's typical target audience).
Toys: the backbone of the business – The toys business is the "bread and butter" of the platform as it accounts for a majority of the revenue and earnings. We believe this segment is well positioned for the remainder of the year given the strong pipeline of product releases, which includes a strong line-up of licensed products (i.e., DC Comics, Monster Jam, etc.).