• Undervalued Real Estate which covers 90% of its market cap

• MCS Trades at a material discount to its peers despite a solid track record of capital discipline & shareholder Return

• Management is aggressively buying back stock

• I see 60% upside driven by clear near-term Box Office catalysts, 20-30% upside to near-term estimates, and strong recovery over the next 2-3 years

• Capex cycle normalizing, setting up for improved free cash flow generation.

Very Brief Company Overview

Marcus Corp. operates two distinct businesses: Marcus Theatre, the 4th biggest exhibitor in the United States, and Marcus Hotel & Resorts, a collection of owned hotels and managed hotels for leading brands. The financial breakdown is as follows:

My quick pitch will revolve primarily around the theatres business, which has multiple imminent catalysts in the near and medium-term.

The Longer-Term Box Office Recovery

I won’t spend too much time explaining the theatre industry. A friend of mine, Raging Bull Investments, has written a multi-part deep dive on the space, which provides a better understanding of the industry's structure. Give him a follow! For now, I want to focus on a few key points:

The Box Office is on a clear recovery path, with 2025 estimated to break through $10b this year finally. See the chart below:

The recovery is driven by a few factors:

1. The recovery of movie supply is gradually being driven by the six major studios as they re-engage with the box office. This has been especially true over the past 12 months, as several films originally planned for streaming-only releases (Moana 2, Lilo & Stitch, Alien: Romulus, Smile, and Mean Girls) became significant successes for the studios at the box office:

   

2. The growth of alternative studios, especially among the major streaming companies, was initially seen as a direct competition but is now increasingly viewed as complementary to the theater industry. This includes Amazon, which has committed to 14 wide releases per year; Apple, which has pledged $1 billion annually for films in theaters; and even Netflix, which is gradually relaxing its rules regarding theaters. Below is a chart showing the number of movie releases from other studios: while the total is significantly higher, it’s important to note that most are not wide releases.

   

3. The industry was heavily impacted by the 2023 writers' and actors’ strike, which has affected movie supply and recovery in 2023 and 2024. However, this is setting up the industry for a massive 2025, 2026, and 2027.

   1. For 2026, we have Avengers: Doomsdays, The Mandalorian, Fast X, Dune:Messiah, Toy Story 5, Shrek 5, Spider-Man, Moana Live Action, Ice Ag 6, and Super Mario Bros 2. For 2027

   2. For 2027, we have Avengers: Secret Wars, Lord of the Rings: Hunt for Gollum, Frozen 3, Sonic 4, Batman Part 2, How to Train Your Dragon Part 2, Legend of Zelda, Spider-Man: Beyond the Spider-Verse and another Star Wars movie.

2025: A key Catalyst for the Equity

For now, MCS is set to have a very strong 2025 driven by a box office that is significantly outperforming expectations with YTD +24%, and Q2-to-date up over 60% YoY:

At these levels, Marcus should be printing cash, and the remainder of Q2 and Q3 are set to be very strong as well, with How to Train Your Dragon live-action set to surpass all prior movies. F1, Superman, 28 years later, and Fantastic Four all tracking very strong according to presale data.

Marcus generated $155.2m in EBITDA in 2019. I would not be surprised if the business approaches $130m this year (vs $108m estimates) and potentially reaches its prior high in 2026, should the Hotel segment remain consistent.

Hidden Real Estate Value

Unlike its competitors, Marcus owns the majority of its real estate within its theatre segment, and 7 hotels within its hotel segment.

Today, its real estate is valued at cost within its balance sheet, and given its long history of operation (Marcus Corp was created in 1935) I wouldn’t be surprised if a good chunk of it is carried for peanuts. According to the latest 10-Q filing, the company’s net property and equipment value is $693 million, or $22 per share. Assuming all of the debt (approximately $200m) is tacked on to the real estate (and not the operations), the company would still have an equivalent of $15.65/share in net properties AT COST. MCS trades today at $17.66. Effectively, close to 90% of its market cap is covered by its Real Estate at cost, alone.

While unconfirmed, I’ve heard rumors that the Grand Geneva Resort & Spa, their best asset, is worth over $100 million on its own.

Alright, alright, I am sure the skeptics here will argue that the value of the real estate will never be crystallized, and that management will never monetize any assets. I do not believe this is true, which I will discuss in my next section.

Clear History of Divestitures, Capital Return & Smart Capital Allocation

Despite being Family-owned, Marcus has proven to be fairly shareholder-friendly over the years, and I am not talking about dividends only:

1. In 2006, at the peak of the US Real Estate bubble, MCS divested its budget lodging assets and issued a $7 special dividend to its shareholders. At the time the stock price was a little under $22

2. In 2012, while its stock remained depressed at around $12, management bought back close to 7% of its shares outstanding and declared a special dividend a year later

3. The company had increased its dividend at over a 12% CAGR between 2013-2019

4. In late 2022, the company divested its Skirvin Hilton Hotel for $36.75m at 13.6x 2019’s EBITDA and 19.7x LTM EBITDA, while MCS traded at 6x EBITDA

5. During the pandemic, management took on convertible debt. As soon as they were able to redeem it, they called it in cash and immediately started buying back shares, repurchasing $10m in 2024 and another $7.6m in Q1 2025

6. Management recently reinstated its dividend and is paying its common shareholders 10% more than the Class B shares owned by the family

It’s worth noting that despite being the most shareholder-friendly in the space, and the least levered, with a hotel business that should trade at a meaningful premium (most hotel REITs trade at 10x+ EBITDA), MCS trades at a steep discount to competitors, which makes no sense:

Usually, the discount does not last, and betting on a catch-up trade has proven to be lucrative in the past:

I believe MCS should slowly close the discount to both Cineplex (CGX) and CNK (Cinemark) in the near-future.

Valuation & Last Key Points

My valuation is pretty straightforward:

Assuming the company returns to $155m of EBITDA in 2026, using 7x EBITDA, the stock should be worth $28 or close to 60% upside from current trading levels ($17.66).

Also worth noting that the company’s FCF burn is back-weighted. Assuming they can generate $30m of FCF this year (despite $80m in capex) that means over 50m of FCF will accrete to the EV over the next 3 quarters, or 10% upside alone. For 2026, at $155m of EBITDA, I would expect the company to generate 65-70m in FCF, or 13% FCF yield for a business that owns most of its real estate.

Risks

• Potential perception of secular challenges at the Box Office

• Hotel business is more economically tied, but as of May, management stated that its bookings are tracking ahead of 2024 levels DESPITE facing difficult comparison from the Republican National Convention in Milwaukee. Also worth noting that Cinemas have historically been resilient during economic downturns, and this has proven true in recent months

• Over the last two years, MCS has gone through a period of significant capital investments driven by deferrals in its hotel business during the pandemic. Last year, the company spent $79m in capex and is set to spend another $80m this year. However, we are at the tail-end of the cycle, and capex should normalize at $50m, setting the stage for meaningful FCF

Disclaimer: I am long NYSE:MCS. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time.

Bragg Gaming Group (NASDAQ:BRAG) Update

Bragg reported Q1 2025 results on May 15th. Here is the link to my initial pitch for those who haven't read it.

The capital structure is as follow:

The company reported solid results, but slightly lower than consensus. Betcity/Netherlands explains the miss, which I will discuss in more detail later.

Revenue was +7.1% YoY and EBITDA +19.7% YoY. On a sequential basis, revenue declined by 3%, excluding the impact of Betcity/Netherlands, and better than typical seasonality seen in iGaming:

USA revenue grew 61% QoQ and 338% YoY!! More importantly, EBITDA grew close to 20% YoY, while capex only grew 7% YoY. This is thanks to proprietary content, which grew 9% QoQ and 62% YoY. This is extremely important as the main historical pushback (besides their significant revenue concentration to a single customer) has been the lack of FCF generation. I believe the business is now at an inflection point, and we should see consistent improvement in FCF conversion metrics; management is slowly showing the scalability of the model.

Betcity continues to weigh on overall topline growth. The customer is now 16.5% of revenue versus 26.9% last year in Q1. It declined 14% QoQ after declining 15% QoQ in Q4. This is all driven by the regulatory changes in the Netherlands which have weighed on results. However, the added disclosure around the contract clearly shows that Betcity contributes a lot less to EBITDA:

Using some of the metrics provided on the presentation and using the commentary around gross margin on the call, it’s easy to see that while Betcity contributes 16.5% of revenue, it likely contributes less than 7% of EBITDA. And even if Betcity were to drop Bragg at the end of 2026 (It’s almost impossible for them to drop them at the end of 2025), by that point, Betcity would be immaterial, and most of the 3rd party aggregated content would stick. Finally, it’s worth remembering that Bragg has a leadership position in the Netherlands with 30%+ market share. If BetCity were to migrate away from Bragg, I would expect significant customer churn in the near term, which Bragg’s other customers would capitalize on. But again, Betcity is simply not an issue anymore.

Finally, I know there are some concerns about the achievability of the revenue guidance management has set. While the 120.25m revenue guidance implies very aggressive sequential growth, I don’t think it matters much. Why? Because the company is clearly showing they can grow double-digit profitably while shedding low-margin revenue (Betcity). The mid-point EBITDA guidance seems completely intact, even if they come at the bottom end of the revenue range. It’s important not to lose sight of the bigger picture:

Bragg is expanding its EBITDA margin at 150-200 bps a year, with a clear sight to 30%+ EBITDA margins. The business is growing at a healthy clip, actively reducing customer concentration, and has significant operating momentum and industry tailwinds (iGaming is growing 20% YoY + new Jurisdictions are coming). Betcity is becoming less meaningful, revenue is shifting to higher-growth/higher-margin areas (USA, Brazil, proprietary content), and paid down debt with a credit facility on its way for flexibility. It’s becoming a much healthier business, making it easy to underwrite a much higher multiple for the stock. Meanwhile, while they remain capital constrained, they are finding creative ways to unlock optionality like the RapidPlay investment within Brazil.

And if you are unable to assess how good their products are (which, from my work, is seen as best in class), just look at all the nominations the company has received over the last few weeks: At SBC, one of the biggest gambling awards:

Game Aggregator of the Year
Game Mechanic/Feature of the Year
Socially Responsible Initiative of the Year
Employer of the Year

At EGR, another well-recognised event, they were shortlisted for nine categories:

Slot Supplier of the Year
Casino Software Supplier of the Year
Full Service Platform of the Year
Aggregator Platform of the Year
AI Solutions Supplier of the Year
Employer of the Year
Safer Gambling Software Supplier of the Year
Innovation in Mobile
Innovation in RNG Casino Software

I’ve tweaked my model a bit and reduced my revenue growth to 15% this year (instead of 17%), but I have kept EBITDA intact:

Since my March update, a couple of tailwinds have popped up: Ohio just rolled out an iGaming bill that is very likely to pass. Alberta has approved iGaming, which is set to launch in early 2026. Management won two new customers: Bet365 in Mexico and Casino Times in Ontario.

Bragg remains my highest conviction idea and I believe management can reach $50m+ of EBITDA over the long-term which would allow me to underwrite a $20+ stock

Danaos Corp. (NYSE:DAC) Update

Danaos reported Q1 2025 results on May 13th. Here is the link to my initial pitch for those who haven't read it.

As a reminder, the cap structure is as follow:

The stock trades at 3.1x EPS, 0.45x book value while actively buying back stock. In Q1, the company bought $33.7m worth of stock, and another $19.4m post-quarter for 264.6K shares.

Management continues to completely de-risk the story: Contracted revenue is basically secured for all of 2026 and with the recent strength in the shipping industry due to the tariff pause, I wouldn’t be surprised if management further de-risks 2027:

Effectively, Danaos has over $3,700m in contracted backlog at a 70% EBITDA margin or $2,590m in value, with a remaining average contracted charter duration of 4 years. You are basically buying the existing backlog and getting everything else (hard assets & future earnings) for free. As a reminder, even if rates were to collapse, the company is still on track to earn well over $17.62 of EPS:

But I think this scenario is less and less likely. At this point, with all the new 15 ships coming late 2027 and into 2028, I believe Danaos, through buybacks, can effectively continue to earn $27-28 up until 2032 and potentially beyond.

Many have an aversion to shipping stocks, especially given the industry collapse from 2008 to 2020. But similar to other cyclical leasing companies like aircraft lessors, or equipment lessors, if the company can manage its maturities properly, such that earnings volatility during turbulent times can be reduced. If that were to happen, then one could ascribe a multiple derived from its ROE, which would be well over 6x EPS. It gets pretty easy to underwrite a stock worth well over $200. As a reminder, Atlas Corp, which was a publicly traded containership lessor, was acquired for 9x EPS. Atlas had longer-term contracts (8-9 year remaining maturity), and was levered but it still gives you a sense of the potential upside.

While you wait for the stock to re-rate, you are receiving a 4% dividend yield, share count continues to decline, and cash builds. Management has consistently increased the dividend since fixing its balance sheet in 2021. I would expect them to bump their dividend to $1/share/quarter in November.

I continue to hold the position and remain very bullish on the stock.

Quipt Home Medical (NASDAQ:QIPT)

Quipt reported Q2 FY 2025 Results on May 12. Here is the link to my initial pitch for those who haven’t read it. I have exited my position, and will walk you through my rationale.

My investment thesis was primarily anchored on two specific outcomes. First, that activism leads to the announcement of a strategic review. This was proven wrong in late March when management agreed to a standstill with both activists but released a press release outlining strategic priorities that did not hint at a business sale. Second, that the company’s KPIs would continue to improve. However, this quarter demonstrated the opposite:

Patients served took a meaningful step down, and while some of it is attributable to seasonality, the drop was steeper than expected. And while management is doing a good job holding the margins and improving cash flow over the last two quarters, revenue growth is simply anemic:

Management reported their Q1 results in February. They had spoken of improving trends and were confident in returning to normalized growth of 2% QoQ over time. But now, they mention that the weakness they’ve seen in January and February reversed in March and April. This means that management was aware of the existing weakness when they signed the standstill agreement and reported Q1, but decided to misdirect investors, likely to win the proxy fight and appease the activists. It's hard to get behind that. While I still believe the asset would be perfect for a PE looking to set up a home medical equipment platform, I can’t solely rely on that as an investment thesis.

I’ve overstayed my welcome on the stock, but I’m now happy to move on.

Disclaimer: I am long NASDAQ:BRAG, & NYSE:DAC. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time

• 94% Gross Margin, 38% EBITDA margin, 24% net income margin, and 25% ROE business trading at 10x 2026’s EPS growing double-digit

• Significant industry tailwinds support double-digit organic growth for the foreseeable future

• Management team with significant stock ownership that has proven to be shrewd capital allocators

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Company Overview

Gambling.com is a performance marketing company that operates gambling-related websites, allowing online gaming operators, such as FanDuel, Bet365, and DraftKings, to acquire depositing customers. Its main websites include Gambling.com, Bookies.com, Casinos.com, RotoWire.com, as well as over 60+ local websites.

The business model is similar to that of other publicly traded affiliate marketing companies, such as QuinStreet (Insurance.com) or LendingTree.

Revenue is monetized in three ways:

Cost per Acquisition (CPA) revenue, which represents 50% of net revenue, is earned through a fixed fee model for each user it refers to an operator who subsequently registers and makes a deposit.

Revenue Share fees represent 15% of revenue, and Gambling.com earns a percentage of the net revenue generated by the referred users over a specified period or for the user's lifetime.

Hybrid model fees account for 35% of revenue and combine the two previously mentioned revenue streams.

Gambling.com primarily focuses on referring customers to online casino products. 62% of its revenue is generated through iGaming and social casino products, while the vast majority of the remainder comes from sports betting products. 48% of its revenue is derived from Europe, 44% from North America, and the rest of the world accounts for 8%.

GAMB’s business model is extremely attractive, boasting a 94% gross margin, a 38% EBITDA margin, a 30% net income, and an FCF conversion rate of nearly 100% of net income. Despite that, the company continues to trade under 9x EPS and 5.5x EBITDA, driven by multiple headwinds which I believe management is actively addressing:

A bit of History

Gambling.com Group was founded in 2006 by Charles Gillespie (Current CEO) and Kevin McCrystle (Current COO). Following a few years of exponential revenue growth (2017-2022, 49% CAGR), driven by domain expansion & new market legalization, the company saw its growth impacted by Google changes both in 2023 and early 2024:

At the end of 2023, Google rolled out some updates to its platform that affected GAMB’s SEO performance in the UK & Ireland for its core business. At the same time, the company started to invest in media partnerships by offering sports and casino content in a digital newspaper in exchange for traffic to GAMB’s site. However, Google changed how it handled commercial content on high-authority sites in early 2024, making these media partnerships less effective and forcing management to lower their expectations. The stock price fell from a peak of $15 to below $8 in June 2024. To be conservative, management zeroed media partnership revenue in their guidance and accelerated growth in their own websites, which led to a Q2 beat and raise. Below is a chart that provides further context:

Following the Q1 2024 Google Media partnership impact, which forced them to reduce guidance, the business went on to report record results for Q2, Q3, and Q4 2024.

Consistent Market Tailwinds Ahead

GAMB is a beneficiary of iGaming legalization, which is set to grow 12% CAGR globally and 28% CAGR in the US through 2030.

Only seven states have legalized online casinos: New Jersey, Delaware, West Virginia, Pennsylvania, Michigan, Connecticut, and Rhode Island. Every year, several states try to introduce bills to legalize iGaming. While most of them don’t make it, only one bill every two years needs to pass for companies to experience huge growth. In 2025, ten states put forward bills to legalize online casinos. Most have failed this year, but what’s going to happen when states need more tax revenue and the online casino floodgates open? GAMB’s earnings could skyrocket, easily creating a scenario where EPS could be 2-3x higher than what it is today. In the meantime, even without new states coming on board, the industry is still growing by 20% in the states that have already legalized online casinos.

It’s also worth pointing out that the online casino market could be way bigger than sports betting. Take Pennsylvania: in 2024, online casinos pulled in $2.2 billion in gross gaming revenue, while sports betting raked in just $511 million. This trend is pretty common in other places too, like Ontario, where online casinos dominate with over 80% of the market:

And this is just North America. Management is slowly expanding into new regulated markets, like LATAM (Mexico, Colombia, Peru, Chile, and Brazil), where sports betting and online casinos are taking off.

An additional area of market growth for GAMB is the penetration rate of the US affiliate marketing model. According to management, ~30% of new customers in mature European markets are acquired through affiliate marketing, versus 5% in the US today. As the American market matures and online casinos proliferate, I expect significant affiliate marketing growth to drive user acquisition.

Both of these tailwinds and the upside from Missouri's potential launch as a sports betting state in late 2025 (which is not included in their guidance) give me confidence in management’s ability to execute their long-term plan to reach $100m of EBITDA.

Shrewd Management & an Attractive M&A Playbook

Management has proven itself to be shrewd capital allocators through a very attractive M&A playbook. Historically, they’ve acquired smaller affiliate players and used their know-how to grow traffic and improve monetization. For example, in early 2024, GAMB opportunistically acquired Freebets.com from XLmedia, a dying company, for 5.6x EBITDA. The acquisition was highly successful, which is part of why the company was able to increase guidance consistently through 2024. According to IR, the effective price paid has already dropped under 4x EBITDA.

More recently, in a bid to address some of the past issues affecting the business and grow recurring revenues, management acquired Oddsjam, a technology platform for real-time odds data. The company allows real-time odds information for bettors. Historically, the model was catered to retail clients, but they are now looking to expand into enterprise customers through GAMB’s existing relationships. The business is complementary to its other offerings (specifically rotowire.com) and helps reduce its reliance on operators’ customer acquisition budgets and grow its sports betting segment. Management paid $80m or 6.7x 2024’s ($12m) and 5.5x 2025’s EBITDA for a high-margin, recurring revenue stream. They’ve also structured an additional $80m in contingent consideration if Oddsjam doubles its EBITDA by 2026!

But M&A isn’t their only capital allocation focus. When the stock cratered in early 2024 due to the temporary headwinds I mentioned above, they quickly plowed their cash flow into buybacks, repurchasing $27m worth of stock under $10/share.

Lastly, management has a massive incentive to grow the business. Not only does the CEO own 12% of the company, but he gets compensated 170K option awards for every $500m market cap milestone, up to 2m options if the valuation reaches $5.5b:

The option milestones are governed by very strict provisions (merging won’t help), are not subject to accelerated vesting, are automatically withdrawn if financial statements must be restated, and must be held for another three years after being awarded.

Valuation

The stock currently trades at 12x estimated 2025 EPS ($1.08) and 10x 2026 EPS ($1.35). For 2025, management expects $170-174m in revenue and $67-69m in EBITDA. Oddsjam contributes $29.5m in revenue and $14.5m in EBITDA. So, organically, they are set to grow revenue and EBITDA by about 10% (excluding Missouri). Beyond 2025, the stock should get a boost from Alberta’s upcoming iGaming launch, set to start in early 2026. It also wouldn’t be crazy to believe an additional state or two could legalize iGaming in 2026, setting the stage for material upside to the numbers.

Management aims to reach $100m of EBITDA over the next several years, both organically and through M&A. They could achieve it in 2027, earning me over $2.00 of EPS. At 12x earnings, the stock would be $24.50 or 79% upside from current levels:

As I mentioned above, this business generates close to 100% of its net income in FCF, setting up for over $2 in FCF by 2027 while likely growing double-digit for the rest of the decade.

Risks

• Regulatory change is the only constant in gambling, which is partly why gambling companies trade at a discount, in addition to being ‘sin’ stocks. Regulatory changes could include a rollback in iGaming laws, stricter player controls, deposit limits, or tax changes

• Google Search policy changes could impact the business once again

• Companies employing an M&A playbook are prone to blowups, especially if they lever up

• Mark Blandford, an early investor in the company, owns 8m+ shares and has sold stock in the past

Disclaimer: I am not long NASDAQ:GAMB. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

Jakks Pacific reported outstanding Q1 2025 results. Here is the link to my initial pitch for those who haven’t read it. I continue to hold my position.

Results were far above my expectations and street estimates. Revenue was $133.3m, +26% YoY versus estimates of $92.9m. Gross margins expanded to 34.4%, up 1100 bps, and EBITDA came in at $0.4m, up from -$17.2m last year, and versus estimates of -$14.2m. This is the second Q1 positive EBITDA in the last 15 years for the company. Cash balance remains exceptionally high, at $60m or ~$5.40/share. The dividend remains in place, which now yields 5.34%

Unfortunately, this got totally overshadowed by the retaliatory moves against China. But at a crazy 145%, even if a lot of toys are affected, it really puts the industry at a disadvantage compared to other consumer products. I wouldn’t be shocked if retailers start giving more shelf space to other categories. Like the president mentioned, these tariff levels can't stick around for long and will probably drop soon. So, I’m sticking with my position.

For now, the tariffs likely have very little impact on the business, given that we are in the lull of the toy industry (Until September). However, if the tariffs were to stick until August, there is a significant risk that 2025 is a write-off. While Rosen, their largest shareholder, might provide some US manufacturing capacity for Jakks, it is likely too small to matter. Any plans to move factories outside the US would likely take 18-24 months, but that’s just my best guess.

Given its solid balance sheet and phenomenal 3-year setup, I am happy to ride out the noise.

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Thryv (THRY) Update

Thryv reported Q1 2025 Results on May 1st. Here is the link to my initial pitch for those who haven’t read it. I continue to hold my position.

It was another solid quarter, but with one small caveat to keep track of, which I’ll discuss later.

Revenue was $181.4 m, -22% YoY, versus estimates of $174m. EBITDA was $20.9m, versus estimates of $18.9m. SaaS revenue came in at $111m, +50% YoY and +24% organically vs estimates of $108m and now represents 61% of revenue:

The company guided to Q2 SaaS revenue of $113-115m, slightly above estimates of $114m. However, due to macro concerns, they decreased full-year SaaS guidance from $464.5 - $474.0m to $460.5 - $471.0m. On the call, the CEO clarified that he has not seen any degradation in the trends so far, but wanted to be conservative, thus the Q2 guidance above estimates. This is consistent with many other public companies that have taken a prudent approach to guidance.

One area of concern is that the user count decreased sequentially from 99,000 to 96,000:

The decline in users is partly driven by the company’s strategic pivot in late 2024 to move slightly upmarket and focus more on multi-center adoption instead of converting customers away from their marketing service platform. This pivot also explains the increase in ARPU from $324 in Q4 to $335 in Q1 and seasoned NRR of 103%. At the end of 2024, the company had 38,000 SaaS customers that came directly from its Marketing Services. This dropped to 34,000 in Q1:

‘During 2024, we converted approximately 46,000 clients from our digital Marketing Services to our Thryv Platform, generating a $37.1 million increase in SaaS revenue during 2024. As of December 31, 2024, approximately 38,000 of these clients remained as active SaaS clients. As of March 31, 2025, approximately 34,000 of these clients remained as active SaaS clients.’

This means the company added 1,000 customers outside of the zoo in Q1. While I am not too concerned, it could become worrisome if it’s the start of a trend.

Overall, my model, assumptions, and upside are unchanged:

As I said in my write-up, this is a pitch for those happy to ride out potentially bumpy quarters but are okay with holding the stock today, given the substantial 3-5-year upside. This quarter changed nothing about that thesis; the story keeps chugging along.

Disclaimer: I am long NASDAQ:JAKK, & NASDAQ:THRY. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time

• Net cash technology company with 60%+ gross margin trading at 0.5x revenue, 5x EBITDA, growing double-digit with some of the highest profile customers you can think of

• A clear beneficiary of a challenged consumer environment and potential inflationary pressure from tariffs

• A recent contract exit is masking a company growing at 21% with an expanding margin profile

• Recently launched a product with Bank of America and PNC that I believe could more than triple its revenue base

• Highly incentivized board with 35% ownership and significant capital markets expertise

Business Overview​

Snipp Interactive is a Platform-as-a-Service (PaaS) company specializing in customer acquisition, retention, and engagement. Its modular Snipp platform offers various tools to help brands design and manage promotions, loyalty programs, rebates, and more, all of which aim to drive brand sales. ​

Bear with me; I know it all sounds like tech-gibberish, but it’ll make a lot of sense soon. Here is a summary of Snipp's key product offerings with direct links to their use case to better understand the products:

• SnippCheck: A mobile receipt processing solution that enables brands to execute purchase-based promotions and loyalty programs by validating consumer purchases through receipt images. Here is a link to a promotional campaign Snipp activated with Starbucks

• SnippWin & SnippRewards: A promotions, rewards, and sweepstakes platform that facilitates various promotional activities, including contests, instant win programs, and gamification, to engage consumers and enhance brand visibility. Here is a link to a contest program in partnership with Conagra​

• SnippLoyalty: A modular customer loyalty platform offering flexible earn-and-burn mechanisms, deep personalization, and segmentation to drive customer engagement and retention. Here is a link to a case study where they built Bally’s loyalty app

• SnippRebates: A SaaS platform that allows brands to set up and manage rebate programs, offering streamlined digital rebate processing that is flexible, efficient, scalable, and secure.

• SnippInsights: A platform that provides advanced basket analysis, dynamic reports, and actionable insights for analyzing consumer behavior and purchase patterns.

The company handles all the back-end and front-end infrastructure needed to run the programs, including program design and fraud detection & prevention. Historically, the business operated through short-term high-margin contracts, whereby its technology and services were licensed to customers for a specific promotional program, and short-term low-margin revenue, where revenue was based on a pre-determined redemption percentage of the program. Management has recently focused on long-term recurring revenue streams by licensing its data solutions, APIs, and enterprise products.

Despite being a $20m market cap stock, Snipp boasts some of the most impressive blue-chip customers you will find in a micro-cap business:

Snipp operates within a rapidly growing industry. The company reports a 35% rise in digital coupons available over the past five years. The market is expected to expand at a double-digit growth rate, propelled by increased smartphone penetration, inflationary pressure & economic challenges, and new collaborations between brands, financial institutions, and retailers.

In early 2024, management launched its new Snipp Financial Media Network product with Bank of America and Triple, a PNC Financial subsidiary. I believe this product will be a game-changer and could completely transform the business.

Snipp Financial Media Network: A Game Changer

SPN first introduced its SnippMEDIA division on June 13, 2022, when Tom Burgess was appointed President. Management has been discussing the Snipp Financial Media Network (FMN) ever since but had very little revenue or profit to show for it until recently. In 2024, FMN launched with two of the biggest American banks, Bank of America and PNC Financials (through Triple), allowing it to reach and gather data on over 30m+ individuals.

So what exactly is the product? Through the banks’ websites and apps, Snipp offers a platform that allows customers to redeem specific deals and promotions and earn cash-back offers from consumer brands. For example, customers can log into their bank app and receive SKU-level offers, such as a $35 coupon for Carnival Cruises. Here is a view of BoFA’s app, created by Snipp:

Snipp effectively serves as an intermediary between banks and consumer brands. The platform enables them to capture customer data, which can then be monetized. This platform lets brands get first-party and SKU-level data that would otherwise be inaccessible. For banks, this product enhances engagement and introduces a novel approach to client retention.

Snipp is set to monetize this product in two ways:

1. Generate a percentage of the promotion’s redemption value within the banking app. This is a high margin ‘recurring’ type revenue and has yet to be monetized

2. Contract consumer brands for large-scale targeted promotions using newly acquired first-party data. This will be executed both within the app and through emails, alerts, and other means sourced from the bank and Snipp’s databank.

In January 2025, the company announced its first FMN contract with a top food and beverage company. Through this program, the brand will offer ‘Buy X Get Y’ promotions to targeted customers.

Management already has multiple additional large-sized banks and credit unions in the pipeline. FMN could transform Snipp from a micro-cap unknown Canadian-listed microcap business into a digital marketing powerhouse. While I believe management can grow double-digit core revenue for the foreseeable future, FNM could generate $100m+ in revenue alone, with significant EBITDA margin expansion as the product scales.

For context, publicly-traded peer Ibotta operates a product called the Ibotta Performance Network (IPN). In 2024, Ibotta generated $180m from the product. Here is a picture of its offering:

It’s effectively the same offering but for different verticals. I wouldn’t be surprised if Ibotta looks to acquire Snipp to expand its offering to banking partners.

A Consumer Backdrop Characterized by Inflation: The Perfect Environment For Its Business?

Grocery prices have increased significantly in recent years. Coupled with financially strained consumers, Snipp’s core products are key in helping brands incentivize purchases, grow loyalty, and access SKU-level consumer data without relying on retailers.

With Trump’s latest tariff policy, North America's chances of a recession are rising rapidly. I believe the company is well-positioned to capitalize on this scenario. Historical data from the Great Financial Crisis indicates a more than 29% surge in coupon demand in 2009. Consumer goods businesses were there to meet the demand: Coupon supply increased 11%, and average coupon value was up 9%. Remember that Snipp relies both on long-term recurring revenue contracts and short-term redemption-tied contracts.

It seems like some of the employees agree. Here is a quote from the VP of Sales at Snipp on LinkedIn:

Additionally, consumer brands increasingly view retailers as competitors due to the growing sophistication of private label brands. Consumers are increasingly seeking value and actively trading down to private labels. Often, consumers cannot tell that the products they buy are private labels. Brands are looking for ways to promote their brand outside of the retail network, and SnippMedia fits that need perfectly.

I believe this, coupled with their focus on long-term recurring revenue, is part of the reason we are seeing significant growth in their core business. Bookings backlog reached a high in 2024, and deferred revenue, an indicator of future revenue recognition, was up 27% YoY and 77% over Q4 2023.

A Highly Institutional & Aligned Board of Directors

In contrast to typical micro-cap firms, SPN’s board includes members with extensive experience in capital markets and shareholders who are well aligned:

• Atul Sabharwal: Chief Executive Officer & Director and owns 16.4m shares (5.7% of the shares O/S)

• Sarfaraz Haji: Chairman of the board and CEO of Lark Investments, a family office. He personally owns 1.4m shares. Lark Investments itself owns 53m shares (19% of the shares O/S)

• Brian Tunick: Director and prior Senior Manager at RBC and JP Morgan, specializing in retail. Following his retirement from the industry, he accumulated 9.5m shares personally (3.3% of the shares O/S) and was eventually instituted on the board following multiple conversations with the CEO

• Sina Miri: Independent Director and current Chief Technology Officer at Bally’s. Bally’s took a stake in SPN in 2022. They paid $0.25/share, or a 56% premium versus the prior day’s closing price, for 25m shares (9% of the shares O/S)

Each board member holds a significant stake in the stock and does not receive any compensation for their board responsibilities.

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Why This Opportunity Exists

Snipp acquired a business called Gambit in 2022. Gambit Rewards is a platform that integrates loyalty programs with online gaming and sports betting. It enables users to convert unused loyalty points from various rewards programs into digital play tokens, which can be used to participate in free-to-play games and place risk-free bets on sports events. At the time, the company had three major customers: Swagbucks, Bally’s, and Dave & Busters. Unfortunately, the acquisition led to a material negative impact on profitability, as one of their contracts, Swagbucks, became deeply unprofitable. SPN’s gross margin dropped from 56% in 2021 to 31% in 2023, primarily due to campaign mix changes and costs related to integrating Gambit. To improve profitability, management sunset the contract inherited from Gambit, which has led to a revenue decline of 29% for the first nine months of 2024. However, gross margins have sharply rebounded, improving from 28% in the first nine months of 2023 to 60% in the first nine months of 2024! The company is set to return to overall topline growth in Q1 of 2025, with Q4 being the last quarter impacted by the contract exit.

Despite this major headwind, core revenue has continued its steady march up, growing 21% for the first nine months. The presentation is updated as of Q2 (growth accelerated into Q3) but provides a clearer view of the core trends:

​As if that headwind was not enough, the company encountered delays in filing its audited annual financial statements for 2022, primarily due to revenue-recognition errors. The British Columbia Securities Commission issued a temporary cease trade order (CTO) in July 2023, restricting trading for the stock due to the filing delay. This CTO remained in effect until January 2024. The stock plummeted more than 50% over the course of 2024 when the ticker began trading again! Basically, anyone looking into the company would quickly skip the stock because of the CTO situation and the crazy swings in revenue and profit margins since 2022.

After posting strong Q3 results, with revenue up 21% for its core business and an improved EBITDA margin to 10.5% of revenue, the stock shot up from $0.07 to $0.12. However, it gave it all back, driven by the market meltdown in recent months. This feels like a great setup to enter the stock, especially given that three contract renewals and two new contracts were announced since its last earnings results.

Risks

Snipp relies on revenue from short-term contracts tied to redemptions. These contracts can be unpredictable, and any changes in promotion timing or the loss of a contract can significantly affect a quarter's results.

FMN’s ramp could create near-term cost pressure as management invests in new customers, a sales team, and its technology. However, this would be offset by material revenue acceleration.

This is a micro-cap; liquidity is sparse, the stock and profitability have been volatile in the past, and the company has faced some filing issues, as discussed. Keep that in mind when looking at the stock.

Valuation

SPN capital structure is as follows:

I expect the company to sustain double-digit growth, anchored by the expansion of its core business into new categories (For example, Snipp recently entered the toy space), continued macro tailwinds, and ramp-up of FMN in 2025 and into 2026/27. Operating leverage should kick in as the company returns to growth in 2025, and EBITDA could reach mid-teens eventually:

It’s worth caviating that if FMN ramps much faster than expected, management might sacrifice some margin to invest in its growth as it could be an opportunity worth well over $100m in revenue.

Given its gross margin profile, it wouldn’t be a stretch for the company to trade at 1x revenue, which would be a stock worth $0.12 on 2026’s revenue numbers. Using 8x EBITDA on 2026’s number, I get to a stock worth $0.11.

However, looking beyond the short-term figures, this business has the potential to more than triple its revenue base, given FMN, the microenvironment, and the favorable industry trends. Looking at other companies in the space, there is a path to a 30%+ EBITDA margin and a 15%+ FCF margin in the long run. I wouldn't be surprised if a strategic buyer like Ibotta or a financial buyer, such as vertical market acquirers like Constellation Software, seeks to acquire the business. It would be a perfect platform from which to expand.

Conclusion

I am effectively buying a net cash business set to grow by double digits for a very low revenue and EBITDA multiple for the foreseeable future. The stock also has significant optionality: the monetization of Snipp FNM and inflationary pressure/recession from tariffs, which could boost digital coupon demand.

Disclaimer: I am long TSX-V:SPN. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

XPOF reported Q4 2024 results on March 13th. Here is the link to my initial pitch for those who haven't read it.

Unfortunately, I was wrong about this one, plain and simple. Taking a 50% hit in less than a month is painful. I haven’t sold my position yet, but I’m also not buying more. I hope to get clearer insights at their upcoming investor day in May.

Alright, let’s get the bad stuff out of the way:

Q4 2024 results came in higher for revenue ($83m vs estimates at $81m), but EBITDA was lower ($31m vs consensus $35m)

More importantly, the company’s 2025 guidance completely missed the mark. Revenue is projected to be $315-325m, essentially flat but well below my $337m number, and EBITDA $120-125m, up 5% YoY but below my $135m number. Net studio openings are set to be at 210, well below my 300-400 range.

The results were not great, and the guidance even less so. A few other issues likely scared investors:

• Management restated the 2023 financial statements and made minor changes to the 2022 and 2024 financials. I believe the accounting errors were the least of investors’ worries. The 2024 10-K was subsequently filed the next day

• The Franchise Disclosure Documents for their brands had yet to be filed, and management expected them to be filed in the coming weeks, which impeded their ability to sell licenses. This created additional uncertainty. As of the date of this post, all FDDs except for Lindora have been filed

• Closures will remain elevated in 2025 as the company prunes out underperforming franchisees, which means lease termination expenses will remain elevated. Coupled with legal expenses, FCF likely remains muted for the year

• The CEO hinted at additional brand divestitures if trends do not stabilize quickly. It would make sense for Rumble and CycleBar to be on the chopping block

That being said, a few positives came out of it:

• System-wide sales are set to grow 13%, with same-store sales growing mid-single-digit. The disparity between system-wide sales and revenue is primarily related to equipment & inventory sales, where the company is looking to switch its business model

• AUV made a new high at $668K in Q4, driven by Club Pilates, Yoga Six, and sequential improvement in StretchLab. Here is a chart outlining the performance of their scaled brands:

Same-store sales for their most scaled brand, Club Pilates, continue to remain very strong. However, despite signs of stabilization, many other brands have weakened:

I can’t deny that this could be an interesting opportunity moving forward. Club Pilates’ valuation is probably still around the same ($17 per share). Once the underperforming franchisees are cut out, the overall brand portfolio should be in a better place. International opportunities are starting to grow, and free cash flow will be much higher if franchise closures stabilize. However, there’s definitely heavy lifting ahead: Management needs to get same-store sales for Pure Barre and StretchLab back on track, as they still account for 28% of total system-wide sales. The CEO has mentioned the possibility of selling off some smaller brands, but it’s unclear how that will impact EBITDA (likely positively). Here’s an updated model that shows how my target price has changed after the ‘kitchen sink.’

Beyond the numbers, the real issue is convincing the market that XPOF isn’t just a mix of brands that might end up being fads; Fitness stocks often end up falling into that bucket. XPOF’s portfolio approach was a solid pushback against that negative perception, but now that’s starting to be questioned. Especially if they begin selling off several brands. Who's to say Club Pilates won’t end up like StretchLab? We need to see some solid improvements in other brands quickly. Otherwise, it’s tough to justify a valuation of 15x FCF. The CEO could be right when he says the company expanded too fast and just needs to get its processes in order. However, until churn drops to 3% and the other brands show better health, this stock is likely to trend sideways.

If there's one thing I've learned from this, it's that timing turnarounds can be tricky. Waiting for that classic ‘kitchen sink’ approach often seems like a smarter play when a new management team takes over. I haven’t sold my position yet, but I’m also not buying more. I hope to get clearer insights at their upcoming investor day in May.

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Bragg Gaming (BRAG) Update

Bragg reported Q4 2024 results on March 20th.

Bragg remains a top conviction idea for me as revenue visibility is quite high, and the business is insulated from all the macro-noise.

The Q4 results were pre-announced in late January, so there's nothing new there. However, the company exceeded its pre-announced EBITDA by 2.6%, laying the groundwork for a more achievable 2025 guidance.

Here are a few interesting tidbits from the filings:

• Betcity, Bragg’s biggest customer, declined from 22% of total revenue in Q3 to 18% in Q4. This is a great development, as reduced reliance on Betcity should lead to a higher multiple. Despite Betcity’s revenue declining 15% QoQ, and 29% YoY, Netherlands revenue grew 33% QoQ and 97% YoY!

• Growth ex-Betcity was 9% QoQ and 35% YoY

• PAM & Exclusive content continues to grow at an explosive pace, at 14% and 16% QoQ. PAM increased despite a 15% QoQ decline in revenue from Betcity, which is impressive:

Pipeline momentum seems to have continued into Q1, with the launch of their newest game far exceeding expectations and multiple PAM opportunities in Europe and the Americas. The guidance also contemplates no additional deal wins, but multiple Caesars-like deals are in the works.

The sole negative of this earnings report is the 39% QoQ rise in capex. As previously mentioned by the company, they are accelerating their game release schedule from around 50 to nearly 100 in North America. This uptick in game investments typically leads to several one-time certification expenses. Additionally, the certification and licensing fees associated with entering new regions (e.g., Brazil, Delaware, New Virginia) and launching with different operators further drove capex up. Management stated that capex should remain consistent as revenue scales in 2025, setting the stage for accelerated FCF generation.

My updated valuation is as follows:

Based on my forecast, BRAG now trades at 4.9x 2025’s, 4.1x 2026’s and 3.5x 2027’s EBITDA for a double-digit, secularly growing business:

Since my mid-February update, a couple of industry tailwinds have popped up: Arkansas just rolled out an iGaming bill a few days ago. Plus, Finland has launched its gambling reform bill, which is gearing up the market to open in January 2027. I wouldn’t be shocked if Bragg lands PAM clients in Finland.

Keep an eye out for the upcoming refinancing of their debt and the renegotiation of their Betcity contract at the end of the year.

East Side Games (TSX:EAGR)

East Side Games reported Q4 2024 results on March 24th. Here is the link to my initial pitch for those who haven't read it.

EAGR’s Q4 results were tepid. Revenue was down 5% QoQ and 1% YoY, and EBITDA was 3% QoQ and 45% YoY. KPIs deteriorated, with DAUs down 10.6% YoY and MAUs down 6% YoY.

Given the excessively cheap valuation on EBITDA & FCF and two potential blockbuster games coming out, I continue to hold the position. The company is aggressively buying back as much stock as it is allowed and is finding creative ways to bypass the TSX’s daily volume rules by actively sourcing blocks to retire shares.

Excluding one-time costs of $1.2m in Q4, FCF ex-working capital swings would have been $6.7m, and the stock would be trading at 5.1x normalized FCF

Management announced two new games in its Match-3 category: RuPaul’s Match Queen and Squishmallows Match. The company believes both of these games have blockbuster potential. Note that the existing RuPaul game is currently the company’s biggest game. With the launch of these two games, the company should return to growth. They’ve also rolled out their long-standing Trailer Park game on the Epic Games Store, and about 21% of their recent downloads are coming from there. Store fees are 12% of revenue, which is significantly better than the 30% charged by Google and Apple. This could be a good way to boost their margins without added costs.

Conclusion

After a stellar 2024, 2025 is starting out rocky for a few names in my portfolio. I feel less excited about some names, some have reached my target price, and some have simply not been executing. Given the recent drawdown in the stock market, various new opportunities are popping up. I expect to cull a few ideas in 2025 (some that I haven’t pitched here, but you can track on my X account) to make space for higher-conviction stocks.

Disclaimer: I am long NYSE:XPOF, NASDAQ:BRAG, and TSX:EAGR. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time.

• Home Medical Equipment provider trading at a depressed 3.2x EBITDA valuation on the cusp of fundamental inflection

• Recent activism has received minimal coverage from industry analysts but is expected to lead to the announcement of a strategic review

• A 78% recurring revenue business highly insulated from a potential recession, with KPIs making a new high last quarter

• Several headwinds impacting fundamentals last year are now in the rearview, supporting an improved organic growth outlook

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Company Overview

Quipt Home Medical provides home healthcare equipment (HME) and respiratory therapy services for patients with chronic conditions like sleep apnea. They source and supply essential medical devices, including oxygen concentrators, CPAP/BiPAP machines, and ventilators. The company works closely with doctors and insurance providers to ensure patients receive the right equipment, offering in-home setup, training, and 24/7 support.

The company generates revenue primarily through selling and renting home respiratory equipment and providing ongoing service and support to patients in the United States. Close to 80% of revenue is generated through recurring revenue streams (respiratory resupply, oxygen therapy, etc). Here’s a breakdown of their main revenue streams and associated payor mix:

The industry is benefitting from secular tailwinds driven by an aging population and the rising prevalence of chronic diseases. The shift toward value-based care and patient preference for in-home treatment has also been a tailwind. Both factors have helped and will continue to help the industry sustain a mid-single-digit revenue growth rate.

Context on Recent Weakness

Following a period of strong performance from 2017 to 2022, Quipt was hit by multiple company and industry-specific headwinds.

The widespread adoption of GLP-1 for weight loss sparked concerns within the industry about its potential to decrease the need for CPAP machines used to treat sleep apnea, which is closely linked to obesity. This apprehension notably compressed market multiples for DME companies. More on this below.

In February 2024, alongside the Q1 2024 earnings results, management revealed that the company had received a civil investigative demand from the U.S. Attorney’s Office for the Northern District of Georgia under the False Claims Act. The stock dropped for several weeks following that announcement.

Quipt was also hit by multiple external headwinds throughout the calendar year 2024:

• During the global pandemic, regulators raised Medicare reimbursement rates—referred to as the 75/25 blended rate—to assist the durable medical equipment sector. This increase was eliminated on January 1, 2024, impacting organic growth by 2%

• The Change Healthcare (Owned by UnitedHealth) cyber-attack impacted the business materially in 2024. The attack hurt QIPT’s ability to determine patient eligibility and materially impacted their receivables collection process

• The company experienced the withdrawal of Medicare Advantage members due to a shift in strategy with one managed care provider

• The fast rise in interest rates brought their M&A playbook to a screeching halt, despite their robust balance sheet (1.5x levered)

All of the issues listed above led management to miss their targeted 8-10% organic growth rate and contributed to the modest decline in revenue and EBITDA in recent quarters.

Trends Are Improving in Real Time

While the stock languishes at lows, trends have been improving in real time. Patients served, a key KPI for the company, bottomed in fiscal Q2 2024 and reached a new high last quarter:

This is also true for other KPIs, such as a number of set-ups and resupply.

While taking longer to show, both Revenue and EBITDA margin have stabilized and started improving sequentially:

In their latest earnings call, management stated that demand remains consistent, and the team is confident in returning to their sequential 2% organic growth target. This statement is supported by open market purchases by the CEO and a board member, amounting to 144,000 shares.

People's concerns about GLP-1 adoption and its effects on sleep apnea are also slowly fading away. Resmed, the biggest maker of CPAP machines, did a study with nearly 1 million patients and found that those prescribed GLP-1 drugs are more likely to start CPAP therapy and resupply at higher rates:

One potential additional near-term tailwind is the House of Representatives recently introducing a bill to re-implement the 75/25 blended rate. The bill seems to have bipartisan support and could be a pricing tailwind.

Lastly, the False Claims Act investigation I mentioned earlier has been a significant concern for the stock and has played a big role in its price drop. But these kinds of investigations are pretty common in the industry. Every HME company has faced scrutiny in the past, including all the publicly traded competitors. Historically, the fines have been on the smaller side. Take Lincare (Linde), for instance; they serve about 2 million patients and pull in over $2 billion in revenue, yet they settled with regulators for just $25.5 million over fraudulent billing practices in early 2024. False Claims Act Settlements for 2024 averaged $5.2m and are substantially lower if one removes the outsized settlements from larger companies.

Given that QIPT decreased by 30% after the investigation, a scenario where the settlement is double the average would probably serve as a significant catalyst for the stock!

Activism

On December 12th, 2024, Forager Capital Management, which has been a shareholder of QIPT for some time and had consistently filed 13-Gs, filed a new 13-D. The fund outlined that it may take action regarding its investment in the company. A few weeks later, another firm, Kanen Wealth Management, started aggressively buying shares and also filed a 13-D. On January 25th, 2025, Kanen went activist, outlining its intent to solicit proxies for the election of its own nominees to the board of directors.

On February 1st, management quickly entered into a standstill agreement with Forager Capital. Why would Forager enter a standstill agreement so quickly after filing a 13-D? My rationale is simple: Forager entered into an agreement because management promised them something. I believe that ‘something’ was hinted at in their latest earnings press release, dated February 10. Below is their Q4 2024 commentary:

‘‘We are well-equipped to allocate capital toward strategic opportunities, while also investing in organic growth to build long-term shareholder value.”

Compare it to the commentary from Q1 2025, which saw a notable change in the language used regarding management’s strategic initiatives:

“Furthermore, we remain committed to exploring and pursing all avenues to drive shareholder value.”

Fast-forward to March 4th, 2025, Kanen enters a standstill agreement. Pursuant to the agreement, Kanen has withdrawn its proxy solicitation in exchange for the establishment of a new board committee to ‘‘review and provide analysis and non-binding recommendations to the Board pertaining to Kanen’s previously communicated recommendations related to corporate governance and other areas related to the Company’s operations.’’

It’s almost too obvious that the company is to announce a strategic review and put the business up for sale. But the market doesn’t seem to care. Only one sell-side analyst discussed the activism, and none have done any work on the potential outcome of a potential strategic review; I believe Quipt is the perfect acquisition target for building a platform, especially given recent private equity interest in the industry.

A Clear Acquisition Target

Following Owens & Minor's consolidation of Apria in 2022 and Rotech in 2024, Quipt became the fourth largest player in the HME sector.

Adapthealth, Lincare, and Owens & Minor dominate the market, accounting for around 50%. Beneath them, the market remains fragmented, consisting of over 6,000 small regional and local service providers.

Since the mid-2010s, private equity interest in the space has significantly increased. A 2023 report by PESP identifies 51 known private equity firms with direct interest in DME companies. Many of these firms are considerably smaller than QIPT. If a major private equity firm were looking to scale quickly, who would be a better acquisition than QIPT, especially given its favorable valuation?

It’s also worth noting that a similar-sized operator, Performance Home Medical, was acquired by PE Grant Avenue Capital in 2024. The advisory firm that led the process outlined on its website that Grant Avenue was actively looking for an acquisition to establish a DME platform.

Interestingly, Forager Capital Management is a shareholder of both QIPT and sister-company Viemed (VMD). Quipt had spun-off VMD in 2017. Could Forager push the two entities to re-merge, creating a much bigger, scaled player?

Valuation: Both a problem and a Catalyst

There is one small problem with Quipt: Yes, it’s cheap… but the whole industry is cheap:

On EBITDA, QIPT is much cheaper than its comps. However, the gap quickly recedes when factoring in patient capex, which is the capital expenditure required to service its existing patient base, is relatively high. This further reinforces the point that Quipt would be better out of public markets and as part of a private equity platform.

The most recent precedent transaction took place in July 2024, when Owens & Minor acquired Rotech for 6.3x LTM EBITDA. If a similar multiple is applied to QIPT, it would suggest a target price of $6.58, or 177% upside. If no transaction occurs and organic growth resumes at its 2% QoQ rate, QIPT could align with peers at 5x, which would give us a target price of $4.70, representing 98% upside.

Risks

• The False Claims Act investigation ends up being significantly more material than anticipated, leading to a decline

• Trump’s administration could impact the industry through Medicare changes. However, the DME industry seems to have bipartisan support on many issues… so far

• GLP-1 ends up being a real secular headwind, but that seems unlikely given market participants ascribe a rich valuation to CPAP manufacturer Resmed

Conclusion

QIPT bets on a fundamental inflection amidst a potential strategic review announcement. I want to be candid that investing in QIPT’s competitors (AHCO, OMI, or VMD) could also make sense. However, the combination of extremely depressed valuation, a relatively good balance sheet, inflecting fundamentals, and activism makes this one a little more interesting to me.

Disclaimer: I am long NASDAQ:QIPT. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time.

Jakks Pacific (JAKK) Update

Jakks reported Q4 2024 Results. For those who haven’t read my initial pitch, here is the link to it.

Results came in below my estimates: EPS came at $3.79 vs my $4.03 estimate but higher than street estimates. Part of the miss was due to direct selling expenses, up 25% and significantly higher than I expected. Adjusting for it, EPS would have been $4.08. I obviously got a little too excited for the fourth quarter. However, this quarter has changed very little in the long-term story. I was quite happy to hear management discuss the next 24-36 months and the potential to bring the company to new heights.

Importantly, management announced a $1 annual dividend, payable quarterly. This is in line with my expectations and a major step forward for the business as they start returning capital to shareholders. The stock now yields a 3.7% dividend. This represents less than a 30% payout and I expect it to grow as they build momentum in their evergreen business. Five years ago, Jakks was on the brink of bankruptcy; In 2021 the company fully-paid its death spiral convertible debt, cleared its debt in 2023, and its preferred shares in 2024. The turnaround has been impressive.

There continues to be noise around tariffs and that might continue to contribute to the stock’s near-term volatility. Trump has announced an additional 10% tariff on all Chinese goods which is set to come in effect March 4th. The lack of manufacturing capability domestically for the industry, and the fact that the majority of action figures & dolls are manufactured in China, means that tariffs will ultimately be passed on to the consumer. Jakks’ relative low price point could ultimately benefit from the environment.

I expect the first half of 2025 to be strong; last year the business was facing a weak movie slate, and write-down of inventories due to Wish’s box office bomb. This year, the company will be shipping ABG products, Simpsons & Dog Man toys and likely will benefit from the carryover of Moana and Sonic from the streaming releases. International momentum also seems to be picking up. Despite the difficult comparison in the back-half of the year, management expects to grow both revenue and earnings this year - this means that Jakks is set for 3 years of very strong earnings growth. My ultimate earnings power for the business remains unchanged at $7 which I believe they could achieve in 2027. This would be driven by international expansion, ABG rollout and Simpsons, and the 2027 movie slate of Frozen & Sonic. At the current stock price, you are paying <7x LTM EPS for a business set to grow CAGR double-digit for the next three years (building into 2027), and actively reducing its box office dependency. I also expect $30m of FCF at a minimum every year (barring any major working capital swing), or a mid-teens FCF yield to the EV, with upside to $40-50m FCF in 2026, 2027 and beyond.

Along with the earnings result, management also put out an 8-K with the company’s yearly bonus structure. Interestingly, this year, both CEO and CFO were awarded RSUs that vest if the stock price reaches $45, $52.50, and $60. I believe this is the first time the company has awarded its executive RSUs that are directly tied to stock price performance. This also comes at the same time as the company amends its change of control provisions for its executives. Maybe it’s nothing, maybe it’s something. But at a minimum, management is well incentivized to get the stock working.

Bragg Gaming (BRAG) update:

For those who haven’t read my initial pitch, here is the link to it.

There have been a number of positive announcements since the management pre-released in-line Q4 results and guided to a blowout 2025, which I discuss in this link:

Four new customers were announced:

Svenska Spel in Sweden, Estoril Sol Digital in Portugal, Loto-Quebec in Canada and TeamMexico in Mexico. Both Svenska and Loto-Quebec are the largest player in their respective jurisdiction and are state-owned entities.

Despite the 27% move in the stock since my pitch (from $5.43 CAD to $6.90), the valuation barely changed; the stock was 4.7x my 2025 EBITDA estimates, and now it is 5.3x the updated guidance. Here is a quick updated model following their 2025 Guidance:

Outside of their guidance update, one of the most interesting developments was an interview done by Bragg’s LATAM director. In the interview, she outlines that the company expects to add more Portuguese partners in the future. But the most important comment was regarding the recently announced Caesars deal:

The Caesars partnership has higher margins than the corporate average, and another similar deal could materially accelerate margin expansion.

Another major development was the recent renewal of Kambi’s contract with Betcity. Why is this relevant? Well, Betcity is Bragg’s largest customer at 22% of revenue as of Q3 2024 but likely lower as of Q4. There has been a lot of worry surrounding Betcity’s plans to internalize its sportbook and player account management (PAM) functions, effectively cutting out Bragg and Kambi. This seems unlikely now, especially since Bragg’s PAM is directly integrated with Kambi’s sportsbook and Betcity’s mobile app. Bragg’s contract with Betcity ends Late 2025, thus, I expect management to announce the renewal of Betcity as a customer in the coming months.

In addition to company specific catalysts, the United States has seen a wave of iGaming bills introduced in recent months: Maryland, Virginia, New York, Indiana, Wyoming, Massachusetts, New Hampshire, Illinois and Hawaii. While I expect most to fail this year (Some like Indiana and Virginia have already failed), any new state would be a material positive for the business.

Bragg is my highest conviction idea and is my biggest position today. It is hard for me to find a better idea given the business momentum, partnership visibility, robust balance sheet, undemanding valuation, a macro-insulated story, and a very motivated management team that is looking to monetize. (I do have a bias for gambling stocks, though!)

Thryv Holding (THRY) Update

Thryv reported Q4 2024 Results on February 27th. For those who haven’t read my initial pitch, here is the link to it.

The overall quarter was solid. The company beat Q4 results estimates for revenue and EBITDA. SaaS' organic growth stood at 23%, which is in line with guidance, and management saw some upside from Keap. SaaS EBITDA reached a new high of 16.6%! 2025 guidance was a non-event, as they guided it during the investor day. Thryv’s SaaS achieved the rule of 40 for the second quarter in a row.

I’ve had a few questions regarding the sequential organic SaaS client growth, which was lower than in the past two quarters, and Q1 guidance. Both issues are simply due to seasonality, and this pattern is easily seen in past years:

Net adds in Q4 2022 were only 1,000, in Q4 2023, zero, and finally, in Q4 2024, 3,000. This is also what caused the perceived Q1 2025 SaaS revenue ‘weakness’ relative to consensus: the street was modeling fairly linear net adds through 2025.

Overall, my model, assumptions, and upside are unchanged. As I said in my write-up, this is a pitch for those who are happy to ride out potentially bumpy quarters but are okay with holding the stock today, given the substantial 3-5-year upside. This quarter changed nothing about that thesis; the story keeps chugging along.

Conclusion

Many over the last few days and weeks have asked me if anything has changed with these stocks, given the weakness in their share prices. This February/earning season has been particularly volatile, and many stocks outlined above have participated in that volatility. My conviction on these names is based on their respective fundamental developments, and I try to tune out the near-term noise (unless it directly impacts my thesis). I feel quite comfortable holding all my names listed above through a potentially challenging macro-environment, given their robust balance sheet and idiosyncratic fundamental stories. In the case of BRAG & JAKK, the gambling & toy industries have historically been resilient during recessionary periods, further bolstering my conviction in them.

Disclaimer: I am long NASDAQ:JAKK, TSX:BRAG, NASDAQ:THRY, and NYSE:DAC. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time.

So, here it is:

Company Overview

Danaos is a Greek shipping company. Alright, alright, I know most of you will want to stop reading here but bear with me; this pitch is smaller than usual, and you might like it more than you think.

The company possesses 73 containerships and 10 dry bulk vessels. Currently, the majority of its revenue is generated from the containerships, which are leased (chartered) to liner companies such as Maersk, Hapag-Lloyd, and Zim, through multi-year fixed-rate charter agreements. Essentially, the company does not operate the containerships; instead, it leases the asset and generates a return on its investment.

Danaos came public right before the Great Financial Crisis and spent the following 12 years de-leveraging the business.

The Thesis

Amid the pandemic and the subsequent Red Sea Crisis of 2024, Danaos’ management capitalized on the robust containership market to significantly reduce debt and secure contracts for nearly all of its vessels at strong charter rates. The company is projected to generate over $25 in earnings per share (EPS) annually throughout 2025, 2026, and potentially into 2027/2028, with a stock price of $83. Below is a straightforward chart detailing their 'contracted revenue’ over the coming years:

This revenue is contracted at very high charter rates. I predict that by mid-2025, coverage for 2026 will exceed 90% and be over 60% for 2027. The table below shows a snapshot of some of their ships with upcoming expirations that have been extended. It does not depict their entire fleet since many vessels’ contracts do not expire until 2028 or 2029.

You may be wondering: When will earnings drop in this cyclical industry? All signs indicate the contrary. The Harpex index, shown in the image below, monitors global price trends in the charter market for containerships and recently reached a new all-time high! Danaos management is strategically extending the terms of most of its charters to enhance earnings.

The company is also using this strong market to order new ships and contract all of them for an average duration of 5 years. Management has effectively bridged its earnings all the way to 2032. Here is a list of 13 out of 15 new ships and their contracts:

Even if daily charter rates drop when the earnings coverage for 2025-2027 concludes, the company will still be adding 27% more capacity at strong charter rates for the following 5 years. The stock’s new earnings potential from 2027-2032, even if rates return to 2019 levels, is projected at $17.20 per share. Here’s the quick math:

Some believe 2019’s daily rate of $23,617 is not conservative. However, from 2008 to 2020, the industry faced a significant downturn, and Danaos’ rates still averaged over $20,000/day. Even during the GFC, the average charter rate for a 4,400 TEU containership fell from $36,000 in May 2008 to $20,000 in April 2010. It’s also worth noting that the average TEU capacity of Danaos’ vessels has grown to over 6,000. Below is a picture from a competitor showcasing the 10 and 15-year average charter rates relative to prevailing markets:

Charter rates are higher than the historical average but aren’t exuberant. This is especially true for bigger ships, which seem closer to historical levels.

Effectively, Danaos has over $3,400m in contracted backlog at a 70% EBITDA margin or $2,380m in value, with a remaining average contracted charter duration of 3.7 years. DAC has a market cap of $1,587m and an Enterprise Value of $1,817m. So, not only do the earnings of its existing backlog cover more than the current EV, but you also get all the ships for free and all future earnings associated with those ships.

Historically, counterparty risk was the only thing that derailed Danaos’s contracted earnings. Many liners went bankrupt in the last decade, forcing management to renegotiate contracts. That said, I urge you to look at all publicly traded liner companies; they are flushed with cash! Its customers simply cannot walk out of these contracts.

The math above doesn’t include earnings from the 10 dry bulk ships they bought near the market lows. Management will remain opportunistic; if the dry bulk market continues to deteriorate, they will look to acquire more assets for cheap. Danaos’ fleet average age is also relatively young at 15 years, with the bigger ships closer to 10 years. While some older Danaos ships may be phased out, they account for less than 3% of their contracted backlog. This means that replacement capex should be minimal for the next 5-7 years.

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All right, but this is a Greek shipping company. They will find a way to destroy value, right?

It doesn’t feel that way at all. Management is indicating the complete opposite. Here is their commentary on the last two earnings transcripts:

Q3 2024: Analyst: “Okay, thanks John, that's fairly clear. And just to summarize that simply, given the uncertainty on the new administration, what that means for environmental shifts going forward, that uncertainty plus the fact that newbuilding prices are high and you don't know where this container market is going, you're content with how things are and you'd rather when you order, do it opportunistically to give yourself a better ROE. And given that, it makes sense to just wait.” John (CEO): “Yes.”

Q4 2024: “Our profitability remains consistent, and we are using our strong balance sheet to increase dividends, continue the share buyback, and source opportunities to grow our company for the benefit of our shareholders.”

Danaos’ remaining contractual commitments for new ships is approximately $1,100m over the next 5 years. The management team is likely to finance the majority of commitments with debt. Even if they do not finance the ships, with ∼$600m of FCF/year, they will have ∼$380m in excess FCF/year to deploy. In Q4 2024, management repurchased $48m worth of stock; since January, an additional $15.7m has been purchased. These buybacks are extremely accretive, as the stock trades at 0.46x book value (BV is $180/share). The company has effectively repurchased 4% of the shares outstanding in less than four months. The board has also increased the dividend every year since 2020.

Finally, CEO John Coustas owns 48% of the outstanding shares and is vested in seeing the stock work. A stock trading at 0.46x BV with contracted cash flow usually attracts catalysts to unlock value. Could a potential sale be in the plans? Mr. Coustas is 68 years old and is likely thinking about the next steps for his estate/trust.

What’s Danaos Worth?

You are buying a 30%+ FCF yield, 3x EPS stock with almost a decade’s worth of earnings visibility that is actively buying back stock. Book value per share is accreting at $6.75/quarter, and the backlog grows with every passing quarter. But let’s keep it simple and be extremely conservative; the company will earn ∼$27 EPS per year over the next three years. If the P/BV discount remains consistent at 0.5x, the stock should be at least $131 in three years.

If the market starts realizing that Danaos’ earnings are sustainable, could it trade at 7-10x EPS on normalized earnings? In addition to the $80+ of EPS you are getting over the next 3 years? I think it’s possible. Then, it becomes easy to justify a target price of $200+ vs the current stock price of $83.97

Risks

This opportunity comes with risks, and while many of these are largely countered by the visibility of earnings, you might want to consider these concerns for further due diligence:

The containership orderbook in the industry has expanded considerably, with the orderbook-to-existing-fleet ratio now at 27.5%. This influx of new vessels could exert pressure on charter rates. The majority of these orders are for mega-large containerships capable of carrying over 12K TEU. In contrast, Danaos primarily operates smaller vessels where there are fewer orders and an older industry fleet age. Below is a chart from their presentation:

This supply is coming online as we speak. If geopolitical events were to subdue (specifically the Red Sea Crisis), we could see significant pressure on rates, which could weigh on sentiment.

President Trump advocates for US firms to bring their operations back home. The idea of de-globalization is also gaining attention. This shift could reduce global trade, potentially wreaking havoc in light of a substantial orderbook.

Tariffs are causing significant uncertainty in global trade. Nonetheless, it is important to recognize that tariffs have traditionally benefitted the industry.

A take-under by management is a possibility, especially if the stock remains undervalued for a significant period of time

Carbon emission regulations compel the industry to lower sailing speeds or retire older ships, effectively reducing supply. Relaxing these regulations could increase industry supply.

Closing Remarks

DAC is a relatively small position for me as it is not my typical ‘style.’ However, I have a hard time painting a picture with significant downside, especially in the context of management’s prudent capital allocation strategy.

Disclaimer: I am long NYSE:DAC. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time.

• Scaled franchise brand growing units double-digit with mid-single-digit same-studio sales, trading at 8.5x 2025’s EBITDA and 11x EPS vs comparables at 17.5x and 27.6x, respectively

• Boasts a newly refreshed board & executive team comprised of high-profile professionals (CFO of Domino’s Pizza, CTO of Microsoft, President of Adidas)

• High visibility into future unit growth is completely disregarded by the market

• The recent acquisition of a subscale competitor supports a significantly higher valuation

• My model showcases a stock that could be $60 in 3-4 years (versus $17.35 today)

Company Overview

Xponential Fitness is a franchisor of boutique fitness studios. The company owns and licenses eight fitness-focused brands and one health-focused brand. It is the biggest franchisor of fitness studios, having surpassed Orange Theory during the pandemic. Studios are usually small retail locations with an average size of 1,500-2,500 sqft. Here is a snapshot of each brand and their size:

Club Pilates and Stretch Lab are the company’s ‘crown jewels’, with the other brands still in their infancy. As of the latest quarter, 3,178 studios were open globally, and LTM system-wide sales totaled $1.6 billion. This is important because this is not just some small, unscaled franchisor but a global powerhouse of fitness brands.

Context on Recent Weakness

On June 23, 2023, Fuzzy Panda published a short report on Xponential Fitness. I respect short-sellers who make their work public. It is not an easy job and requires significant due diligence. Many of the points brought forth by Fuzzy Panda were valid criticism. I do not want to dwell too much on the issues, but here are some of the main points:

• Prior CEO Anthony Geisler had a questionable past and was involved in questionable business practices.

• Many of XPOF’s smaller brands were not properly supported, and the projected economics for franchisees were a pipe dream.

• The company was acquiring ‘failing’ studios from franchisees for pennies on the dollar to avoid reporting closures and allow it to claim that no studio had ever closed.

Some of the report's points were true, some were hypothesized but ultimately didn’t pan out, and some have been debunked. Regardless, the short report caused the stock to crash from $27 to $7.49 at its low. Government agencies such as the SEC and the US Attorney’s Office for the Central District of California initiated multiple investigations, and investors lost confidence.

All right, this all sounds really bad, right? Bear with me; a lot has changed since then.

Cleaning-up Shop

Following the short report, the board of directors took decisive actions to improve governance & investor perception :

• In April 2024, Jeffrey Lawrence was appointed to the board of directors. Mr. Lawrence was the previous CFO of Domino’s Pizza and director of Shake Shack. Interestingly, he joined amidst the scandal, which piqued my curiosity. Mr. Lawrence must have done significant due diligence before joining the board. He wouldn’t hurt his reputation for a small retainer fee on the board of a $600m market cap company.

• In May of 2024, they fired the prior CEO, Anthony Geisler.

• In June of 2024, Mark King was hired as CEO and on the board of directors. Mr. King was Taco Bell's CEO, Adidas's President, and TaylorMade Golf Company's CEO.

• In November of 2024, Bruce Haase was appointed to the board of directors. He was the prior CEO of Extended Stay America, a $3b+ publicly traded company. Like Mr. Lawrence, there is no chance he joined without due diligence and risked jeopardizing his reputation.

However, in my opinion, the board/CEO's most telling action (or inaction) was their decision to retain CFO John Meloun. If you are actively trying to turn around a business that is deep in regulatory investigations related to its accounting practices, would you keep the CFO? Unlikely. But Mr. King kept him. Not only did he keep him, but he also praised him. Here is a quote from him:

This is an extremely important detail, as it helped me believe that XPOF’s concerns might be overblown and that the stock should not be trading at the current multiples.

Mr. King also significantly strengthened the executive team:

• He hired John Kawaja as President of its North America division. Mr Kawaja was the prior head of marketing at Adidas and president of TaylorMade, where he worked with Mr. King.

• He hired Kevin Beygi, a former Microsoft director, as CTO. Oh, Did I mention that Microsoft's old CTO is also on the board? He probably recommended Mr. Beygi.

• He hired Eric Simon, Senior Vice President of Franchise Sales and Development at The Joint Chiropractic.

I think you get the picture. The board and management team are now comprised of highly reputable individuals with significant experience in consumer brands. XPOF’s team is completely different, and the market is slow to realize this.

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Impact of Short Report on Fundamental Dynamics

If one quickly looks at recent trends, it appears growth has stalled:

However, this dynamic has been partly driven by the short report. Following backlash on its treatment of underperforming studios, management initiated the closure of all company-owned transition studios. This dragged ‘other services revenue’, which dropped from $17.1m in Q4 2023 to $5.2m in the latest quarter. They’ve also divested two underperforming brands.

If one looks under the hood, the performance is significantly better than it appears:

These closures have also significantly impacted cash flow and profitability. Management reduced the number of company-owned studios from 84 to zero. Each closed location had to pay its remaining lease obligation, leading to significant restructuring charges. Year-to-date, cash flow was impacted by $19.6m of restructuring charges and $14.5m in litigation expenses.

Beyond transitioning studios, the board/management cleaned up a lot of other issues:

• Two underperforming brands were divested: Row House & STRIDE Fitness, and one is being wound down (AKT).

• The California Department of Financial Protection concluded its investigation, fined the company $450K, and forced officers and directors to attend franchise law compliance classes. The California branch is known to be one of the most aggressive in pursuing cases. No wrongdoing was admitted.

• The SEC’s Division of Corporation Finance reviewed the company’s financial statement and found no issues with the financials.

• Mr. King materially slowed the development of new studios to focus on franchise support and sustainably growing internationally. The number of new studio openings was revised to 490-510, down from 540-560 for this year.

All of this is already showing up in the P&L, with adjusted EBITDA in Q3 improving to 38% from 33% last year. It’s worth noting that franchise revenue gross margin is 91% versus 20% for equipment and merchandise. With the unwinding of its leases and the resolution of litigations, I estimate the business could generate $80-90m in FCF for 2025, or a 10% FCF yield for a business with mid-single-digit same-studio growth and double-digit unit growth. Before the release of the short report, management was aggressively buying back shares. Since the new management has little appetite for additional acquisitions, I expect them to use all excess FCF to buy back stock starting in 2025. The growth and buybacks would materially expand FCF/share from $1.56 in 2025 to $3.40 by 2028! I discuss this a bit more in my valuation section below.

You must probably think my assumptions about getting to $3.40 in FCF/share are aggressive. After all, growth this year has been minimal, so why should you believe growth is set to re-accelerate? Well, my belief in double-digit growth is anchored by multiple strategic initiatives that are already in place, which I will outline next.

Significant Embedded Growth Ahead

Xponential Fitness has high visibility in its growth pipeline. As of Q3 2024, they’ve sold 1,980 franchise licenses that have not opened yet. This backlog would add 62% to the existing unit base and provide visibility into the next 4-5 years, at a minimum. The company estimates it could have over 8,000 units in the US alone. While this seems optimistic, I think the opportunity remains ample, especially internationally: 1,093 studios are contractually obligated to open, with over 28 countries having contracts in place. Management has recently signed multiple Master Franchise Agreements in various Latin American, European, and Asian jurisdictions, which should add to its backlog. I forecast 300-400 net studio openings (400-500 gross minus 3% closure rate) every year, which represents 8-10% net unit growth over the next 2-3 years. Two-thirds of the openings will come from Club Pilates & StretchLab in the near term.

I believe there is visibility into an incremental $55m+ of EBITDA using extremely conservative assumptions:

The old management hosted an investor day in September of 2023. While many of the timelines provided are not relevant anymore, the targets serve as a good reference point for its potential growth:

The stock is currently 6.6x the targeted $190m of EBITDA, which is achievable in 2027/2028, in my opinion.

Interestingly, franchisors are usually tied to a single brand; XPOF has 8 brands with a different value proposition. For now, brands outside of Club Pilates and StretchLab individually contribute marginally to the company’s performance, but a few could be primed for a breakout (BFT & YogaSix come to mind). This portfolio approach allows it to diversify the ‘fad’ risk to which fitness companies are usually exposed. One brand to watch out for is Lindora, acquired in 2023. Lindora is a medically supervised weight loss and wellness studio brand that capitalizes on GLP-1s, hormones, and wellness therapy.

The story isn’t all about unit growth. As of the latest quarter, traffic was up 16%, representing the bulk of their systemwide sales growth. Same-studio growth has been consistent and is likely to continue growing at a low to mid-single-digit pace. Xponential has pushed very little pricing over the years. It has relied on implementing price increases for new members while keeping existing member pricing frozen. On their Q3 2024 call, management stated that 96% of their SSS growth had been volume-driven and 4% from price increases. What happens if they start ramping up pricing, like other fitness brands? Especially in the context of their main brands’ classes being consistently sold out. We could see a re-acceleration of same-studio growth from the estimated 4% in Q4 2024 to 5-6%+, driven partly by price increases.

Club Pilates, the Crown Jewel, is Worth All of XPOF’s Enterprise Value. A Recent Transaction Supports This

Club Pilates is XPOF’s crown jewel. Its growth has been consistent, and franchisees rave about the brand. More individuals want to open a studio than the business has available, and these trends are likely to continue for a while. An article published by Athletech News in early January shows that the majority of Pilates studios are growing. Interest in Pilates has rapidly grown, as evidenced by Google's trend toward the word ‘Pilates’ or ‘Club Pilates’.

It’s not only consumers who have an interest in Pilates. In September 2024, Private Equity giant L Catterton took a stake in a Pilates boutique studio, Solidcore. According to a Reuters article, the deal was valued at $600 to $700m. Solidcore at the time had 125 locations, significantly lower than Club Pilates at 1,138. An older article from Reuters outlined that the company was expected to generate $150m in revenue and $50m in EBITDA for 2024. L Cartetton effectively paid 4-4.7x revenue and 12-14x EBITDA. This private equity giant clearly sees interest in Pilates lasting. They paid 12-14x EBITDA for an operator. How much would a scaled franchisor like Club Pilates fetch? Well, let’s do the math:

Club Pilates’ Franchise Disclosure Documents are public records. The latest one from January 2024 shows $78,956 in monthly gross revenue for the average studio:

For simplicity, let’s assume some growth in 2024 and use $80,000/month or $960,000 per year:

At today’s valuation, you are buying Club Pilates and getting every other brand and their associated growth for free. That's pretty wild if you ask me.

Valuation & Comparables

Public markets have, and continue to pay, a significant premium for durable high-unit growth franchises. Yet, Xponential Fitness trades below the valuation of declining and mature franchise assets like Denny’s or Papa John’s:

Despite having one of the highest unit growth and margin profile, XPOF trades at a 50% discount to the peer group. You could add almost every other possible publicly traded North American scaled franchise brand to this comp sheet, and the stock would still look cheap.

I’ve done a simple model to showcase the upside 3 years down the line if the company starts aggressively buying back stock and the stock remains at a somewhat depressed valuation:

XPOF has approximately 56.3m diluted shares (assuming the conversion of its prefs and class B shares) and 325m of net debt (including contingent consideration). My model assumes 10% unit growth in 2025, with a conservative 3% same-studio growth and decelerating trends from thereon for conservatism. There is also an opportunity to refinance the variable debt to a fixed rate of 7% by the end of 2025. With buybacks, management could repurchase 30% of the business over the next three years. Shares are expected to decline from 56.3 million today to 40.1 million by 2028, while free cash flow (FCF) growing from $82 million to $137 million! FCF per share would rise from $1.56 in 2025 to $3.40 in 2028! These assumptions suggest the stock could be trading at 7.5x the FCF of 2026 and 5.2x the FCF of 2028. It is pretty good value if you ask me.

It is not crazy to believe that XPOF can trade at 15x NTM FCF, given its a capex-light, high-unit growth stock. That would still be significantly lower than its comp set. At 15x 2028’s FCF, my target price would be $43 in two years (versus $17.35 today), or a 150% upside. At 20x FCF, which would still be a material discount to its comp set, the target price would be $60 or 242% upside.

Risks

Xponential Fitness, like most other franchises, relies on a very limited number of brands (Club Pilates & StretchLab). If those and all future brands prove to be ‘fads,’ then there is a case to be made that valuation should be low. So far, everything points to the opposite.

Given that most of XPOF’s franchisees are local entrepreneurs, the company’s franchise closure hit is higher than that of other typical public companies. Management estimates ‘churn’ to be around 3%.

A few legacy lawsuits/investigations remain - while I expect them to be dismissed or immaterial at worst, there could still be near-term noise which can create volatility in the stock.

The change in the new management team's strategy could affect estimates in the near term. More details will be provided during their Q4 2024 earnings call. However, I don’t think the strategy will change significantly, as Mr. King has already partly discussed it in the last two earnings calls.

Closing Remarks

Potential near-term noise remains, but we are moving further away from the short report’s thesis while business fundamentals remain solid. This is a phenomenal set-up, as most of the old investor base churns out and is replaced by new investors who slowly discover the ‘new’ company Xponential Fitness has become. It can ultimately lead to an aggressive re-rating of the stock.

Disclaimer: I am long NYSE:XPOF. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time.

• An aggressive decline in a legacy segment is masking a profitable rule of 40 software business, which now represents over 50% of revenue

• the CEO has implemented the same strategy in a prior publicly traded company and 15-bagged the stock

• Multiple tailwinds provide visibility into growth for the foreseeable future

• The SaaS segment is significantly undervalued against both its comparables and any software name of similar size

Segments Overview

Thryv operates in two segments. The first is the legacy Yellow Pages digital and print business, which represents a little under 50% of revenue. The second is a fast-growing software product: a CRM targeted for small businesses with 5 to 25 employees. It has historically been geared toward blue-collar companies, with the biggest verticals being construction, contractors, home and garden, and professional services. Software now accounts for a little over 50% of revenue.

A Bit of History

Thryv was formed following the merger of Dex Media and YP Holdings, both Yellow Pages (YP) companies. Dex Media was led by CEO Joe Walsh, who owned a small software product called DexHub, built in 2015. He rolled over his equity stake and remains the largest shareholder of THRY with 2.2m shares. He rebranded the business and software to Thryv before its IPO in 2020. At the time, SaaS comprised only 7% of revenue, while digital and print YP comprised the rest of its business.

Mr. Walsh strategically pushed to harvest the cash flow from the YP companies in secular decline to accelerate the SaaS transition. It resonated well with the market, as THRY saw its stock skyrocket from $9 to $41 during the ‘SaaS at any multiple’ frenzy of 2020/2021. The stock quickly returned to earth as investors realized the SaaS transition would be significantly slower than expected. Today, the stock languishes at $16.58.

From 2021 to 2024, I felt it was too early to invest in THRY. The rapid decline in overall Revenue & EBITDA far outweighed the small contribution of the SaaS business. While the stock has been abysmal, I have always been impressed by management’s transparency, execution, and ability to stick to the strategy despite the stock market’s pressures.

I believe now is the time to invest. The business has hit a major milestone: software revenue is set to exceed marketing services revenue, while organic SaaS growth has materially accelerated to 29%. The software hit the rule of 40, net retention dollar eclipsed 100%, and its customer count has reached 45% growth.

The CEO Has Successfully Implemented this Playbook Before

Mr. Walsh was Chairman of Cambium Learning, ticker ABCD. He joined in March of 2013, following the resignation of most of the executive team. The new board was instrumental in shaping the company’s strategic pivot. The stock price was $1.01 then, dropping from a high of >$40 a decade prior. Cambium was struggling, with EBITDA declining rapidly and the balance sheet deteriorating at 6x net debt/EBITDA. The new management team stabilized the company and made a significant push into digital and technology-enabled solutions, away from printed educational content.

The strategy is so similar to Thryv that I thought I had a Deja Vu! Here’s Cambium’s old investor presentation:

Interestingly, the stock started rising as soon as Technology-enabled solutions crossed the 50% mark. We are already there with less leverage. Even though Cambium’s revenue only started growing in 2015, the stock was $4.98 by the end of that year, five times higher than in 2013. Thryv in early 2025 is what Cambium was in early 2013.

Cambium Learning was ultimately acquired by a Private Equity firm in 2018 for $14.50, or 13.5x more than when Mr. Walsh joined. The PE paid 4.6x trailing EV/Revenue and 18x trailing EV/EBITDA.

The CEO clearly believes he can replicate this playbook; He has consistently bought the stock in the open market since 2022 and as recently as September 2024.

YP’s Fast Decline is Engineered; Thus Why This Opportunity Exists

Anybody screening and finding Thryv would see the below and move on to another stock:

Thryv’s Marketing Services revenue decline is quite aggressive. Many think it’s primarily due to the secular challenges affecting the business, but it’s not the only story. As a reference point, Yellow Pages Canada is a publicly traded company on the TSX. Unlike Thryv, its Yellow Pages business hasn’t fallen off a cliff. It’s been consistently declining at a high single-digit to low double-digit clip. So why is YP in the US declining at 25%+? Are the dynamics so different in Canada relative to the United States? No. Thry’s management has been engineering the fast decline of its print business, and it has all the incentives in the world to do so.

Under ASC606 accounting rules, Thryv recognizes its print revenue upon delivery. Initially, the US publication cycle was once every 12 months. Management lengthened it to 18 months and, more recently, to 24 months. This allows the company to recognize revenue immediately. However, it also means revenue for future quarters within Marketing Services drops significantly, accelerating the pace of its SaaS mix shift. That said, cash flow is unaffected, as customers are billed monthly.

The company also carries some debt, which scares investors away. The debt itself isn’t an issue; in April of 2024, management refinanced it. Interestingly, the terms were favorable. The maturity was pushed out to 2029, the interest rate dropped from SOFR+850bps to SOFR +675bps, capital return is now allowed, and the mandatory annual repayment dropped from $70m to $52.5m (which drops to $35m after 2 years). It seems like a decisive vote of confidence from debtholders. Management has already pre-paid three quarters worth of amortization as of their investor day.

It also didn’t help that the company completed an equity offering in October 2024 to acquire another software company, Keap. The $80m equity offering was priced at $14.00, 24% lower than the previous day’s closing price of $18.34. While the optics of the acquisition look bad, I think this is a long-term positive.

According to a leaked email circulating on X, Keap was actively looking for investors. They were unable to find one and were getting desperate. Thryv swooped in and opportunistically bought the company, effectively wiping out Keap’s common equity holders. Keap’s revenue has flattened since 2018. While that seems scary, the founder explains what happened in a video on YouTube. Significant changes were made to the strategy following the founder's exit, leading to flat revenue. The video corroborates Thryv’s management’s explanation of the issues.

Keap is expected to generate 75-78m of revenue. The management team paid 1x revenue and 8x EBITDA pre-synergies. Thryv expects $10m in cost synergies and $50m in potential cross-selling synergies over time. More importantly, Keap benefits Thryv in multiple ways:

• It improves product capabilities through the addition of automation tools, such as automatic lead responses depending on specific prompts, lead follow-up, internal reminders, and automatic client onboarding

• Accelerates the transition to a pure-play software stock, adds 15,000 clients for cross-selling opportunities, and slightly increases its upmarket capabilities.

• It comes with 700 channel partners that can sell the Thryv product. Thryv did not have channel partners in the past.

This acquisition is a key catalyst, accelerating the SaaS mix shift while further bolstering its product offering.

SaaS: The Hidden Gem

I want to spend a bit of time discussing the software product. Thryv built itself a niche focusing on providing a CRM for small businesses. When I speak of small businesses, I mean 5-25-employee businesses. Not your 200-employee VC-backed software company. It is your neighbor’s 10-employee veterinary clinic or the local landscaper. Businesses use the product to manage their social media, generate leads, schedule management, process payments & invoices, build & manage their websites, optimize SEOs, etc.

Initially, the company only had one product: its business center, which came out in 2019. Since then, it has expanded its product offering, becoming an all-encompassing platform for managing all aspects of the business. It includes a Marketing Center, a Command Center, Keap marketing automation tools, a Reporting Center, and a Workforce Center, the latter two of which are in the beta phase.

The CRM space is competitive. On the upper end of SMB, Thryv’s competition includes HubSpot and ServiceTitan, both publicly traded and its closest comparable. However, they’ve been slowly moving upmarket, creating a vacuum Thryv is actively filling. HubSpot’s ARPU is over $13K, compared to Thryv’s at $4K. HubSpot’s bread and butter are companies with 200-700 employees, generating 70% of its annual recurring revenue. Thryv focuses on companies with 25 employees or less. While HubSpot’s product offering might be deeper and more complete, Thryv’s simplicity has allowed it to offer a better price point for its target market.

At the bottom end of the market, the company believes it competes primarily against single-product software such as Intuit Quickbooks, Square’s customer products, and MailChimp. Hundreds of other smaller CRMs are available, but most are not scaled.

Despite many competitors, the company’s software segment has consistently grown across most KPIs. They are clearly doing something right.

Why Do I Think the SaaS Growth Will Sustain?

Thryv’s management has several levers to pull to sustain the growth rate for several years. First, it has access to over 200,000 SMBs who are or have been YP clients. Capitalizing on this, they’ve implemented an aggressive strategy to convert Yellow Pages clients to their software platform before they lose them. Most YP services are already offered to these clients through their Marketing Center software. However, the Marketing Center has a significantly lower price point, at $171, versus SaaS ARPU of $380. Effectively, this strategy has caused a very rapid acceleration in user count but materially reduced its ARPU:

ARPU dropped from $387 in Q4 2022 to $307 as of Q3 2024. The strategy is taking advantage of the fact that upselling these customers will be significantly easier and cheaper than re-acquiring them or finding new clients. The company already sees mid-teens ARPU growth one year into this strategy as these customers upsell into different ‘centers.’ Multi-center adoption has also rapidly expanded: 2% of customers had more than one product in Q2 2023 versus 12% as of Q3 2024. Basically, management has a clear line of sight in doubling its user count and expanding its ARPU by over 50% through multi-product adoption.

There is also a massive secular tailwind afoot. Boomers are retiring, and millions of small businesses will be up for grabs by the younger generations. According to an article by The Guardian, Boomers represent 21% of the US population but own 51% of privately held businesses. Many of these businesses continue to use outdated means of managing the day-to-day, especially in the blue-collar verticals that Thryv focuses on. As these businesses switch hands to the younger generations, they will revert to products like Thry’s CRM. It should be a tailwind for the foreseeable future and gives me confidence in underwriting 20%+ growth for the software segment.

Comparing Thryv

Alright, how much do we pay for a software company that is growing 29%, expanding gross margins by 560 bps, and has high visibility into future growth?

Well, let’s compare Thryv’s software segment to its closest competitors, Hubspot and ServiceTitan:

THRY sticks out like a sore thumb. Both comps are 10x more expensive. ServiceTitan’s financials are actually inferior to Thryv’s on all metrics.

It can be argued that the above competitors/comparables are much bigger with entrenched platforms and customers, thus warranting a higher valuation. To a certain extent, that is true. However, even if we compare it to software companies of similar size, the valuation makes no sense:

Despite growing twice as fast as the average software company in the above table, its SaaS business trades at a 50% discount. This analysis also assumes no revenue/EBITDA will be generated from the marketing services business moving forward, which is not the case. Management expects to harvest $250-300m of FCF from the print business from 2025 to 2030. It’s also worth noting that the fast decline of Marketing Services is leading to more costs being proportionally allocated to the SaaS segment, dampening margins today. Regardless, management expects significant operating leverage for the SaaS segment.

Valuation

An investor day was held on December 3rd, 2024, to outline long-term targets. In 2025, they expect 18-20% SaaS growth, mid-teens EBITDA margin, and 75-78m revenue contribution from the Keap acquisition. They expect a 35% decline in revenue for marketing services as they lengthen the print cycle from 18 months to 24 months. However, they will maintain their mid-twenties margin. The company expects 20% SaaS growth and 20% EBITDA margin in the medium term. Using some of the assumptions above, I get the following valuation:

Assuming they can continue showcasing an 18-20%+ SaaS growth rate, it is not crazy to believe the stock can re-rate to 3x the next twelve months’ revenue. I have also assumed no scaling in FCF for the SaaS business, which obviously won’t be the case. At a target price of $54.20, the stock represents a 226% upside in two years.

We can also assume the Marketing Services’ revenue and cash flow are worth nothing, which is a fair assumption. This would get me to the below scenario:

5x revenue does not seem unreasonable when looking at the valuation of all other small-cap software in the above comp sheet. Whatever number you put into the model, THRY easily has 5-10x upside longer term. I also believe there is material upside to 2025’s software growth estimate. The company has guided to 18-20% SaaS revenue growth but has achieved 29% in Q3 2024.

Given the valuation, I am happy to own the stock for a few years, knowing I could 10x my money with significant downside protection.

Risks

SMB dependence - average monthly churn is 1.5%, and small businesses fail often.

Debt & Perceived leverage remain an issue for most investors, which I discussed above.

A faster-than-expected decline in Marketing Services could lead to near-term top-line pressure; however, that has been well communicated, with management’s 2025 revenue guidance already being bombed at -35%.

There was an SEC Subpoena related to the company’s non-GAAP treatment of marketing services customers versus SaaS customers. This seems immaterial, but at worst, they could be fined a nominal amount.

Closing Remarks

This is a pitch for those who are happy to ride out potentially bumpy quarters but are okay with holding the stock today, given the substantial 3-5-year upside. It’s also worth noting that the company’s industry classification under GICS is communication services. Since its software segment represents over 50% of its revenues, management could request a classification into the technology sector.

Disclaimer: I am long NASDAQ:THRY. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time.

• Toy company trading <6x EPS, with 25% of its market cap in net cash, 15% FCF yield, and a phenomenal 3-year outlook.

• $7.00 in earnings power as early as 2026/2027 for a stock trading at $27.70.

• A number of business wins should lead to a material acceleration in EPS as early as Q1 2025.

• On the cusp of capital return with a significant shareholder gaining board representation.

Recap Since My Last Pitch

I initially discussed Jakks Pacific on substack in 2021, which you can find here. The stock traded at $11.74. After years of mismanagement, I made the case that a new CFO had been actively cleaning up the business, and the story was at a significant inflection point. The thesis played out much better than I expected:

• Revenue grew from $520m in 2020 to $712m by 2023 and peaked at $796m. It is also higher than 2019’s revenue of $599m.

• EBITDA grew organically from $18.9m in 2019 to $75m in 2023

• EPS grew from -$0.73 in 2019 to $4.62 in 2023, with net income margins expanding from -1.2% to 7.0%.

• Management paid down over $184.5m in net debt + preferred shares during the pandemic, and its net cash balance will balloon to what I believe will be $80-95m by year-end 2024. This is $24/share in equity accretion, with FCF consistently above $50m!

Surprisingly, the stock’s multiple actually compressed! It is now 3x my estimated 2025 EBITDA, compared to 5x EBITDA when I initially pitched it in 2021. This multiple is completely unwarranted, and I believe the story has never been better.

Jakks Pacific is a Significantly Stronger Business Since my Last Pitch

Jakks develops and sells toys and costumes for those unfamiliar with the story. The company has historically capitalized on licensing existing IPs, primarily with Disney, for its animated movies. Its business model is similar to public companies like Coty or InterParfums, which license beauty brands.

During the pandemic, management worked tirelessly to diversify the business and reduce its exposure to key suppliers. The company has struck multiple blockbuster deals, and some of its smaller partnerships will likely support strong growth for the foreseeable future.

• In 2019, management won the Sega toy license from Jazwares (Berkshire Hathway). At the onset, the partnership was relatively immaterial. However, Sega grew Sonic into an international movie franchise with three movies and a spin-off show (Knuckles) released. Each adaptation grew more considerable than its predecessor, and a fourth movie has already been announced. Sega further signaled its intention to become a global IP powerhouse, reviving multiple dormant franchises for which Jakks owns the master toy agreement. I believe Sonic grew to be nearly 10% of its revenues.

• In 2013, Jakks secured the Nintendo toy license. Similarly, the partnership was relatively immaterial, as the toys primarily targeted gamers and niche collectors. Nintendo had a breakthrough in 2023 with the release of the animated Mario Bros. movie, a significant improvement from the 1993 live-action movie (watch it if you want a good laugh). It grossed $1.36 billion and became a box office hit. It is just the beginning: During their FY 2024 earnings release, Nintendo’s management stated, ‘We recognize that movies are a very effective way to generate interest in Nintendo games, and we will continue to work on movie production going forward.’

Jakks is transforming from being Disney’s puppet to a multi-national toy powerhouse. Everyone traded the stock based on the box office performance of key Disney IP. Many people I’ve spoken with continue to believe the company is primarily hit-driven. To a certain extent, it remains true. However, it’s actively changing: In November of 2023, concurrent to their Q3’23 earnings results, management announced that it had secured a game-changer contract with Authentic Brands Group (ABG) to manufacture and distribute a range of products for its diversified brands.

Jakks has a long history of manufacturing seasonal products. ABG is a $21b revenue juggernaut, so the opportunity could completely transform the business. More importantly, the products ship to brand new retail partners like Academy Sports, and shipments occur in the first half of the year; this is key to the story as Jakks Pacific generates all of its earnings in Q3. Contracting ABG will materially reduce seasonality, reduce holiday selling dependence, expand its retail coverage, and ultimately support a better valuation. ABG alone could add $100m+ to the topline in 3+ years. Shipments have already started, and I expect Q1 and Q2 2025 earnings to be far superior to last year’s results, thanks to this partnership.

That being said, I do not want you to believe that Jakks is losing or in the process of winding down its Disney relationship. To the contrary, Jakks has won almost every toy license for Disney’s new IP animations in recent years, excluding Pixar movies. It includes Raya and The Last Dragon, Encanto, and Wish. Their success has led to further wins with Disney into new categories like the ILY 4ever dolls and Disney Musical Minis. But the biggest came last year: the company won the Simpsons toy license. Super7 was the prior licensee and did a poor job distributing the product. Revenue contribution in 2024 will be relatively small as the company tests reception and distribution. However, momentum should build in 2025, and it will become a growing eight-figure contributor to the company’s evergreen revenue. And hey, we might even get a second Simpsons movie!

Beyond its licensors, its relationship with retailers like Walmart & Target has never been better. They actively provide the company with more opportunities to gain shelf space outside licensed toys. For example, Jakks now manufactures Target’s private-label line of baby dolls. They now make Target-branded toys, like the checkout lane, which Target has outlined as one of their best-selling toys. Retailers also love Jakks’ products as they are relatively cheap, with most products under $50 and the average being around $20.

Jakks gains in its retail customers are not a fluke. It became apparent after I scrolled through various forums and realized that fans love Jakks’ products. Heck, in some forums, fans are begging the IP owner to transfer the toy licenses to Jakk! Here are the top comments on a Reddit post where Jazwares was announced as the Five Night at Freddy’s toy licensee:

It is a significant change in perception. Ten years ago, Jakks Pacific was known for poor-quality toys, lacked product support, and was actively shunned by the fanbase.

Management has also strategically grown its evergreen product line, which the market underappreciates. I estimate that 66% of its sales will come from evergreen + seasonal products in 2024, which are not box office dependent.

Significant gains are also being made internationally. Jakks is chronically underrepresented outside the United States: 21% of its total revenue comes from foreign sales, compared to 30-50% for its peer group (Mattel, Hasbro, and Funko). Management has invested in two new distribution centers in Italy & Mexico over the last 12 months and plans to multiply their business in Europe & LATAM. Its international expansion could add 10-15% to its topline over the next 3-5 years.

Alright, so Jakks is a better business. But how does that help me make money with the stock if it seems nobody cares and it still trades at 3x EBITDA, right? Well, I think the set-up moving forward is extremely attractive.

Box Office Set-up is Looking Awesome; Earnings Could Hit a New High

The above performance was achieved despite an abysmal cinema market, where Jakk’s box office exposure was a fraction of its pre-pandemic level.

The following 3 years will be the best movie set-up for Jakks in a very long time. Some of its more prominent licensed IP have scheduled movies: the recently won Dog Man license will be released next week, Snow White in March 2025, Wicked Part 2 in November 2025, Toy Story 5 in June 2026, Mario Bros 2 in April 2026, Moana live-action in July 2026, Frozen 3 in 2027, and Sonic 4 in 2027. Other potential releases include a Zelda live-action movie and a sequel to Encanto (which was one of Jakks’ biggest successes).

I also believe there is upside to current expectations for Q4 2024. Moana 2 and Wicked are significant properties for the business, but many do not realize that Moana is one of Jakks’ biggest properties. Their box office outperformance could translate into additional shipments for Q4 and 2025, especially when released on streaming. One interesting development during Q4 is that the company’s competitor, Mattel, initiated a major recall for all its Wicked dolls due to label issues. They printed a porn website on the packaging! It was a complete disaster that happened right before the movie's release. Retailers have potentially replaced Mattel’s shelf space with Jakks’ products instead.

Reduced seasonality, improved partnerships, and new contracts are all great reasons the stock should re-rate. However, I believe the story’s most crucial catalyst will be in 2025. 

Line of Sight to Capital Return

Until early 2024, Jakks was restricted from returning capital to its shareholders. It was due to its preferred equity, which had to be paid in full before the board could initiate capital return. Management fully paid it off in March of 2024.

Since then, management has hinted a few times that capital allocation decisions should be announced soon. Based on my discussions with the company, implementing a dividend to attract longer-term shareholders seems to be their preferred route. While I would prefer share repurchases, I think this is a positive first step in changing the stock’s narrative.

Many fear they might announce a big acquisition, destroying all they have worked for in recent years. I don’t think this is a realistic scenario. Why? Lawrence Rosen remains a shareholder, owning nearly 20% of the outstanding shares. Rosen now has representation on the board through director Neilwantie Mahabir, CEO of Rosen’s business.

Jakks is Primed for a Take-Out, and History Supports this Assumption

It was difficult for me ever to envision Jakks being acquired. After all, it was a toy company that owned no IP. One supplier historically made up 50% of its inventory (Disney). Two major retailers made up 50%+ of sales. All of its earnings were generated in one quarter (Q3).

However, my opinion has changed. I think it is essential to contextualize the changes to understand why selling Jakks now would be a good idea.

After the death of his co-founder, Berman (Jakk’s CEO) almost ran the business to the ground. He has been working for more than a decade to fix his mistakes. I think he wanted to honor his late co-founder’s legacy (and pay himself a nice salary at the same time). Today, Berman is 60 years old and has more money than he will ever need. The business is in a better spot than ever, and he likely isn’t as hungry as before.

At the same time, a significant shareholder (Rosen) now has board representation and has been in the stock for over three years. Mr. Rosen is the owner of LaRose Industries, a toy company. He made a fortune in the toy sector and sold his business to Mattel. I don’t think a toy magnate like him is simply passively investing in a micro-cap. JAKK is a very illiquid stock, so getting out of it will be difficult for Mr. Rosen. What is his ultimate goal? He owns 20% of the company, bought additional shares in 2024, and is close to the CEO. He could be the buyer.

Even if he isn’t a buyer, we have multiple companies that have made a bid for the company in prior years:

1. Meisheng Cultural made a bid for the company in 2018.

2. Jazwares has been acquisitive in the past and has a highly complementary business model to Jakks. Especially since they recently entered the costume market with Marvel. They also made a bid for Jakks in 2019.

3. Just Play, another toy company, had bid for the company in 2019. Centerbridge, a private equity, backed them.

During Just Play and Jazwares’ bids, Jakks Pacific’s EV was $200m, with $30m equity and $170m of debt+preferred. The business was distressed, burning through cash, and had extreme supplier concentration. Today, the EV is $220m (assuming $80m in cash), and EBITDA is 4x higher. This valuation makes no sense, and a competitor or private equity firm is bound to pay attention.

Earnings Power

The stock’s earnings power is significantly higher than the current level of earnings. Let’s assume the following for our analysis:

1. Content-led products return to 2022 revenue levels of $218m (Achieved with one movie release only, Sonic 2, and a tailwind from Encanto’s streaming success).

2. Seasonal products, deeply affected by Covid and 2021 container issues, return to 2021 levels of $75m (2019 was $90m) and layer on $75m of additional revenue from ABG.

3. Costumes/Halloween products return to pre-pandemic revenue levels of $120m.

4. 10% growth in its Evergreen business, and net cash is $80m in Q4.

5. 12% EBITDA margin, above the 10.3% level achieved in 2019 but significantly lower than most of its peers (Funko, whose business model is the most similar, has achieved 15%+ EBITDA margins on similar gross margins).

The scenario above gets me to earnings per share close to $7.00. For simplicity, I did not include interest income. It is not a crazy outcome and could be achieved in 2026 and/or 2027 when ABG ramps up, and the strong movie lineup hits the box office. Assuming no FCF is returned to shareholders from now until then, the stock is 2.9x EPS at today’s price—a pretty good bargain, if you ask me. Meanwhile, the company continues to generate $40-50m+ in FCF. While I understand the Q4 cash balance is not representative of the full year given working capital requirements, simply using a smoothed-out cash balance gets you to $40m in net cash plus an additional $40-50m of FCF coming next year. Below is the working capital unwind and potential Q4 cash balance:

8x on $7 EPS would be a $56 stock. However, let’s not even go there. I assume the company will make $4.00-4.15 in EPS in 2024 and $5 in 2025; using 8x in 2025 gets me to a $40 stock today.

Set-up Into Q4 Earnings & Comp Analysis

Despite reporting Q3 2024 results that came significantly ahead of estimates, sell-side brokers decided to reduce Q4 estimates materially for both EBITDA and EPS for God knows what reason, all the while increasing revenue.

Either I am completely wrong, the sell-side is sleeping at the wheel, or management is sandbagging expectations for the fourth quarter. What I do know is that John is one of the most conservative CFOs I have ever met. Make what you wish of that statement.

I want to point out that the Q4 results are inconsequential to the bigger picture, but I always like to know the short-term earnings set up to help with position sizing. Looking at its comps, the stock is deeply undervalued:

I will never argue that Jakks should trade at Hasbro or Mattel’s multiple. They are both highly scaled toy companies, with many of their toy sales derived from their owned IP. However, I want to remind everyone that Jakks’ business model resembles Funko’s. With a very levered balance sheet, Funko trades at 8.5x estimated 2025E’s EBITDA and 6.8x 2026E’s EBITDA. My 8x EPS assumption above does not seem aggressive, especially if earnings consistency continues to improve.

Risks

Tariffs have been topical for many investors. Jakks manufactures substantially all of its products in China. During Trump’s initial tenure, toys were exempt from tariffs. This makes sense, as toys are not a strategically important sector, and Americans have little appetite for working in low-level production. A tariff on toys is also seen as a tax on kids.

Some might call me crazy, but I think tariffs would be a short-term minor negative but a long-term positive for the company. First, the US has very little toy manufacturing capacity, so the tariff will likely be passed on to the consumer, creating an inflationary tailwind on earnings. Second, 70% of the business is FOB origin, meaning the buyer takes possession of the goods at the time of shipping and pays the cost of tariffs on arrival. Lastly, there is no substitute for the toys they make. If you want an Encanto or Sonic figure, only Jakks has it. I don’t think parents or collectors will substitute the Sonic figure for a puzzle because the price has increased from $10 to $12. What is also likely to happen is that parents will trade down from $50-100 toys into Jakks’ price range, further increasing demand. From there, management would have plenty of time to diversify its supply chain base. Recent developments suggest Trump is more worried about Mexico & Canada than China. He recently discussed this with China, and WSJ/Reuters articles imply a positive trade conversation.

I have purposely released this pitch ahead of potential tariffs as I believe any material decline in the stock’s price due to the tariffs would be a buying opportunity.

The company remains dependent on box office performance, and while management has done a great job diversifying its reliance on Disney, it can still face air pockets. Since Wish the movie bombed at the box office, Q1 2024 saw a write-down for Wish toys. The back half of 2025 will be lighter box office-wise compared to 2024. However, looking at the business on a full-year basis is always better for getting a clear picture of earnings trends.

ABG has yet to ramp up, so seasonality remains a key risk. If the holiday period is weaker than expected, it can lead to massive discounts for retailers, which will depress earnings.

Walmart, Target & Amazon represent 63% of the company’s total revenue, which is not too dissimilar to other consumer products companies.

Closing Remarks

There are many ways to win with this stock, and the strong balance sheet provides downside protection if one of the risks plays out. 15%+ FCF with imminent capital returns, and good visibility for the next 3 years. For transparency, I started buying the stock at around $19 in May 2024 and have averaged up around $27

Disclaimer: I am long NASDAQ:JAKK. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

Summary

• Leading iGaming B2B provider with a net cash balance sheet trading <5x EBITDA

• The company has faced multiple headwinds but continues to grow, driven by a strategic focus on high-margin proprietary content and expansion into new markets.

• Founder Matevz's return as CEO and board revamp have strengthened leadership, with significant insider stock purchases

• A clear beneficiary of the global iGaming legalization, a market set to grow double-digit for the next decade

• Significant distribution gains, new markets & client wins will prove to be material drivers of 2025 growth

Quick Business Overview

Bragg Gaming is a B2B iGaming technology & content provider. They offer a player account management platform, back-end infrastructure, sports betting technology, managed services & gaming content (slot games primarily) for iGaming operators like Ceasars Digital, Draftkings, Fanduel, etc. Business split is as follows:

PAM & Turnkey Solutions - a platform solution that includes hosting & security, account management, AML & KYC compliance, user monetization tools, automated operational processes, and managed services (handling of marketing, and website customer service). This is the second-highest-margin segment

Aggregated 3rd Party Content - Offers third-party content, primarily online slot games, through their remote gaming server. Smaller or localized gaming studios rely on aggregators as significant capital & regulatory costs are required to distribute games to different operators/jurisdictions. (For example, every game has to pass licensing tests in Italy and the USA). This is the lowest-margin segment

Exclusive 3rd Party Content - The same as the above 3rd party content, but contracted exclusively. This is the second-lowest-margin segment

Proprietary Content - Bragg develops proprietary content through its three studios (Atomic Slot Lab, Indigo Magic, & Wild Streak). This is their highest margin segment as games carry a 100% gross margin. It is also their strategic focus.

Brief History

Over the years, the company faced multiple business-breaking headwinds, but somehow, fundamentals have continued to improve:

• In July 2021, Germany, representing over 30% of Brag's revenue, moved from a ‘grey’ to a regulated market. The gaming authorities poorly handled the transition, leading to most of Brag’s customers exiting the market that same year. Despite the loss of Germany, revenue grew by 14.4% in 2021 thanks to their entry into the newly regulated Netherlands market that same year through Betcity. Betcity became the biggest Dutch operator, commanding 30%+ market share at its peak.

• From 2018 to 2023, BRAG cycled through 5 different CEOs. Many made disastrous capital allocation decisions.

• In 2021, the prior management team acquired two US-based iGaming content providers: Wild Streak Games & Spin Games. They significantly overpaid for both acquisitions and primarily used equity to fund them. (though to be fair, they used equity when the stock traded at a ridiculous valuation). Both businesses barely contributed to their 2021 and 2022 growth.

• Betcity's success ultimately led to its acquisition by iGaming juggernaut Entain, in early 2023. From the get-go, Entain signaled that they would move substantially all of Betcity's cost structure in-house to boost profitability. Bragg constituted the majority of Betcity’s fixed cost structure; At its peak, Betcity represented 42% of Bragg's revenue. In 2023, Brag extended its agreement with Betcity until late 2025 but lost a chunk of revenue related to its managed services. More to come on this topic below.

• In September 2022, facing a working capital crunch driven by their growth and investments in content, the former CEO & CFO agreed to take on a death spiral convertible debt, with warrants, from Lind Partners. If you are unfamiliar with this type of product, just know that I have never seen a stock fully work until the debt has been cleared. The stock drew down 40% in the following months.

You would think that with all these headwinds, the financial profile of the company would look volatile and devoid of growth, but that's not the case at all:

I am trying to showcase that despite multiple business-breaking headwinds and a lack of leadership, Bragg effectively runs itself and has continuously emerged bigger and stronger.

Return of the Mac, Activism & Strategic Review

After years of frustration and the realization that the existing management/board team was not doing right by its shareholders, founder Matevz was elected as Chairman of the Board. He immediately revamped the board, letting go of most board members and hiring professionals with extensive capital markets & iGaming experience:

I have not invested in many microcap companies with this type of experience at the board level. Matevz ultimately became CEO in August of 2023, and swiftly strengthened the executive team, bringing gaming veterans across all corporate functions.

In November 2023, Jeremy Raper, a special situation & activist investor, became involved with the stock. he released an engagement letter, urging the board to sell the business following years of underperformance. Matevz obliged, and a strategic review was initiated in March 2024. I was invested in the stock at that point. However, following a major rally and new headwinds which led me to believe they would not sell, I exited my position. I outlined part of my reasoning in a tweet in early 2024.

This brings us to recent events: In November 2024, the board concluded its strategic review with no sale announced. The stock dropped 30% on the day. While many are angry and frustrated with the stock, I believe this is an attractive entry price for investors as the business has reached an inflection point and fundamentals have gotten significantly better since the return of Matevz.

Why Invest Now?

Despite extreme stock volatility in the last 3 years, the business has never been stronger:

1. Their investments are finally starting to pay off. As shown in the picture below, revenue growth is materially expanding, with sequential growth at 6%, 11%, and 5% in the last three quarters. More importantly, their 2 strategic segments, PAM & Proprietary Content, are growing at a double-digit clip sequentially!! & gross margin expanding by 360 bps sequentially!! As the mix of proprietary content continues to grow, we should see a material lift in gross, EBITDA, and operating margin.

2. This growth rate will be sustained for a while as the company has materially ramped up its content production and expanded its distribution footprint globally (see picture below). Management has guided to double-digit revenue growth with improved cash flow generation and operating leverage for 2025. In the last 3 quarters alone, the company has launched in 3 new jurisdictions with 6 different operators. They will also double the # of games released in 2025. USA revenue grew 42% QoQ in 3Q2024 and I expect further sequential growth. The US iGaming market is growing 30%+ YoY.

3. Late into Q2, Bragg onboarded two new turnkey solution clients: HardRockCasino in the Netherlands & KingsBet in the Czech Republic. Looking at the two pictures below, traffic on those websites is ramping up fast. Traffic numbers are relatively low, yet, Czech Republic revenue increased from €238K before the launch to €1.06m, in one quarter! Similarly, Dutch revenue ex-Betcity grew 41% QoQ and 97% YoY! As these two websites grow and invest in marketing, it should materially lift growth and margins headed into 2025.

4. Brazil has regulated its iGaming market, and Bragg is one of the few B2B providers that has secured a license before the January 1st launch. Brazil is set to be one of the biggest iGaming markets, sized at US$1.4B and set to grow to $4b by 2030. The company already secured relationships and content with the top operators in the country. I expect announcements throughout 2025. It is also likely that many PAM opportunities will crystallize in the next 12-24 months.

5. Betcity, which accounted for 42% of revenue in 2022, is now 22% as of the latest quarter. The company has been facing a contract renegotiation headwind since Q3 2023 and will run against easy comparables for the next several quarters. In addition, Betcity is facing significant competitive pressure in the Dutch market. Its parent company, Entain, has outlined it as its worst-performing asset for several quarters now and is looking to divest it. Completing a platform conversion during this process would be completely irrational. But that does not even matter. Why? Because in the Netherlands, every iGaming platform must be licensed and approved by regulators. Entain does not have a platform licensed in the Dutch market and market research leads me to believe they have not been trying to get licensed. Effectively, Entain has no path to internalize the platform by the end of 2025 and certainly does not have the incentive to disturb operations while they are looking to divest the asset.

   1. I forecast Betcity to be under 15% of revenue by the end of 2025 regardless. Lower customer concentration should support multiple expansion.

6. To top it all off, the management team & board have loaded up on the stock, cumulatively purchasing $451K worth of stock in the open market in December 2024. This is the first time insiders have purchased in size since…ever. It’s also great to see that the one buying the most shares is the new CFO. He is the most in-tune with next year’s forecast. Given he hasn’t been with the company for long, something is getting him excited.

Longer-Term View

Beyond the near-term catalysts outlined below, there are multiple reasons to get excited about the story:

As Bragg continues to shift its mix away from distribution into PAM and proprietary content, we could see a material acceleration in gross margin and EBITDA margin expansion. In the past, the company guided to 60%+ gross margin and 25%+ EBITDA margin. This is not an outlandish scenario as many iGaming B2B providers have scaled their EBITDA margins above 40% and net income margins above 20%. Even smaller unscaled B2B providers like Kambi boast a 30%+ EBITDA margin.

The iGaming market still has more than a decade of growth ahead. In the United States, only 6 states have legalized online casinos versus 38 states offering Sports Betting. For states offering both, iCasino GGR quickly surpasses Sports Betting GGR. What would happen to the TAM if 30+ states end up legalizing iCasinos? Beyond the United States, LATAM is seeing a wave of legalization. This phenomenon is slowly sipping into Africa and Asia, where the markets remain untapped for the business. Could Bragg recreate the success it had in the Netherlands elsewhere? It sure feels that way.

The company’s products are also gaining steam, especially in the US & Europe. Beyond seeing it in its revenue growth and client wins, Bragg has been nominated for multiple years now in the biggest gambling award events of the industry. In 2024, the company won the Industry Innovation of the Year award at the SBC Awards North America for its Bragg's FUZE™ player engagement toolset. They were also nominated for 7 awards at CasinoBeats for their content innovation. In 2023, the company won Technology Provider of the Year for its PAM & turnkey solutions.

Lastly, as the business grows, I would expect customer concentration to decline significantly. Geographic diversification should also improve supported by outsized growth in regulated markets. These two elements, coupled with improving PAM customer count, should support further valuation upside.

Why does this opportunity Exist?

The stock has been hit over the last year by multiple technical factors and one major overhang which should resolve imminently

• Over the last 3 years, Bragg went through major capital & operational investments. These investments climbed further when Matevz became CEO. Investments were made to strengthen their gaming, technology, legal, and commercial departments. Capex as a % of revenue expanded quickly which depressed cash flow generation (and further contributed to their working capital crunch). However, I believe capex as a percentage of revenue peaked this year. All their gaming studios are fully ramped up and investments to improve game output are now behind them. This was confirmed in the latest earnings call when the CFO expressed his view that they have all the necessary tools to start driving operating leverage. I also had a positive discussion with him, where he outlined that cash flow generation is now a top priority for management.

  

• The issuance of the death spiral convertible debt has been a major overhang. This has weighed on the stock as I believe the mechanisms of the paper attract short sellers (A continuously lower stock price would theoretically force the company to issue an infinite number of shares, further bringing the stock down). However, the company finally paid off the legacy debt during Q3 2024, removing a major technical overhang.

• In early 2024, the company borrowed $7m from one of its Major shareholders. The debt has become current, causing many to worry about the refinancing risk. The amount is relatively small, and the company has improved growth and margins compared to prior quarters, which means management should be able to secure this relatively small financing. I expect a revolver to be announced from which they can draw for near-term working capital needs.

• Lastly, in October 2024, the Netherlands introduced a new set of rules limiting player deposits across the iGaming market. This will likely cause a drop in revenue for Dutch operators. This has been pressuring the shares for some time. In their Q3 call, management stated they felt comfortable reiterating guidance given they were already halfway through Q4. These new rules will be positive to the longer-term story as they will reduce the concentration to Betcity and the Netherlands, supporting multiple expansion. It will also improve the competitive landscape of the market. LiveScore, and Tambola, two operators in the Dutch market, have already exited.

Valuation & Precedents

The stock trades at 4.7x EBITDA. What should one pay for a secular double-digit grower, that will grow FCF at a much faster clip, while materially expanding margins, and diversifying its customer & geographical base? More than 5x, in my opinion.

Conservatively modeling 10-12% revenue growth and margins expanding at 90-100 bps over the next 2 years, and using 6x EBITDA gets me to a stock worth CAD $9.50-12 or 75-121% upside. I could see significant upside to my model on the margin front, especially given the most recent quarter’s gross margin expansion.

As shown in the engagement letter written by Activist Jeremy Raper, precedent transactions in the space support a much higher valuation. Using the lowest valuation paid (outside of SciPlay which is not a true iGaming business), the stock would be worth CAD $16 or 194% upside.

The obvious question I will get from the above comparative analysis is that the board tried to sell and was unsuccessful, so the analysis is pointless. Wrong. In their last press release, management signaled that they remain open to a ‘liquidity’ event. They’ve identified key focus areas raised by prospective buyers (stronger cash generation, increased revenue diversification, accelerated proprietary content growth, and enhanced margins). Notice how all these issues are already improving as we speak? The precedent table remains as relevant as ever.

Closing Remarks

There are a few key events to watch for in the coming months. BRAG’s Q4 call in April should clarify the impact of the regulatory changes in the Netherlands and growth for 2025. the debt refinancing should also be a clearing event. For transparency, I started buying the stock following the Q3 results around CAD $4.50 and averaged up all the way to $5.20.

Ultimately, you are buying a net cash gaming business, with inflecting growth and profitability, trading at depressed valuations, and with a multitude of catalysts ahead. (sounds familiar? See my post on TSX:EAGR which I still like.)

Finally, I want to thank everyone who took the time to read this article. Finding time to write a post has been challenging but I hope it proves useful. If you like the content I publish, please take a moment of your time to subscribe and follow me on X @InflexioSearch as I share ideas more frequently.

Disclaimer: I am long TSX:BRAG. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

Revenue was down 3.5% YoY; I was looking for growth. Margins dropped to 12.4% QoQ (EBITDA went from 4m in Q1 to 2.5m in Q2) on the back of significant UA spend driven by their investment in their new GameKit category, Match-3. These investments are expected to pay-off in the coming quarters as they continue to scale Bud Farm: Munchie Match, Cheech & Chong and recently launched Power Rangers. Bear in mind that Q2 is a seasonally weak quarter.

In vacuum, the quarter seems to be a major step-down from Q1, but this is primarily due to investment timing. When factoring in UA spend on a newly created category + the roll-out of multiple games, it’s understandable to see a dip in margins near-term with the associated payback coming in later (retain customers first, then monetize). This also likely explains the mismatch between recent download trends and revenue trend.

Meanwhile, the continues to throw-off significant amount of FCF with FCF ex-working capital sitting at 5.3m for the first half of the year and 2.3m for Q2. At 0.90c/share, the stock is trading at a 15% normalized FCF yield.

The commentary in the press release and on the call were quite bullish and there were a few incremental points:

The company is targeting $10m of cash by EOY net of buybacks, which IMO could be higher if working capital swings the other way.

As I outlined in my initial write-up, the company is working on a new RuPaul game which they think can be a game changer for the company, especially given the success of the initial one

Power Rangers is performing better than expected and is generating over $1m in revenue per quarter one week into the launch - the company will reinvest all of the revenue into user acquisition in the near-term (which likely continue to depress margin).

Company will launch a new match game by EOY (likely the Queer Eye based match game) and another one early 2025 (RuPaul).

Bud Farm: Munchie Match saw its average revenue grow by 50% and the new Cheech & Chong match game is performing even better than the Bud Farm: Munchie Match game.

Valuation remains undemanding even with the stock being up 20% since my last substack post:

Conclusion

EAGR continues to be quite compelling trading <4.5x EBITDA on 2024’s number. the difference between my expectations relative to to the results seem to be all tied to the timing mismatch between UA spend and the future benefit the company will reap from it.

If the games (especially the new RuPaul) gain any traction, EBITDA could be well above $20m next year. Meanwhile, the company is piling up cash and returning cash to shareholders in the form of buybacks. My target price remains unchanged, and think the stock is worth $1.50

• Emerging mobile game studio with a net cash balance sheet trading under 3x EBITDA, 5x FCF, and 5x normalized earnings

• Savvy management team buying back as many shares as they can while the stock is depressed

• A significant number of games being launched through the year which should materially accelerate revenue & earnings growth

• Multiple partnerships struck with major IPs should support revenue growth for the foreseeable future

Business Model

EAGR’s business model is threefold:

1. ESG primarily partners with well-known franchises to develop free-to-play mobile games targeted at mature audiences. Games are monetized through in-app purchases and ad placement. Ads are 23% of revenue, with in-app purchases generating the remainder of revenue. ESG has been able to reduce its development cost by partnering with content creators and ensuring an initial player base. They have historically focused on counter-culture games, creating a niche for themselves (e.g. Marijuana themed-games, mature content, and LGBTQ+ audience). Many of these new games are based on successful franchises, like The Office, and RuPaul’s Drag Race show.

2. The company builds its games through its proprietary GameKit software. The software has a built-in Greybox UI, ad management & analytics platform, and automated monetization triggers. Effectively, it helps get their games out faster and at a lower cost. Two iterations have been developed: IdleKit and MatchKit. Through MasterKit, management will be able to develop other genre rapidly, such as shooter games ("ShooterKit"), endless runner games ("EndlessRunnerKit"), Clash Royale games ("ClashKit"), and card games ("CardKit"). MasterKit has allowed them to come to market with games at a record speed. For example, they’ve built and launched Cheech & Chong: Kush Kingdom in less than 6 months. The game’s mechanics are extremely comparable to their Bud Farm: Munchie Match game. Effectively, Cheech & Chong was a plug-and-play for them. They are looking to do the same with many other IPs.

3. More recently, they’ve been partnering with smaller studios to develop and/or support the games. The economics of the games are either shared or a fixed monthly fee is paid to the partner to take care of support functions. This strategy has proven instrumental in flexing their cost structure up and down during the difficult market environment which I outline a bit lower.

Here is a snapshot of their current games:

Recent Developments

Like many other gaming companies, 2022 was a challenging year for EAGR:

With the dissipation of COVID-19 and the rapid rise in inflation & interest rates, the mobile gaming industry saw its first-ever revenue decline in 2022. The situation was exacerbated by Apple’s IDFA changes in 2021 which made user acquisition spend ineffective. Management decided to cut down massively on UA spend following the changes which led to a deteriorating profile: sequential revenue decline, ballooning costs, and weakening game KPIs. The stock drew down 80% from its peak.

To make matters worse, one of their studio partner, Truly Social Games, sued them for $100m in December 2022. I will spare you the details of the lawsuit, but needless to say, it was the last straw for many investors. The stock proceeded to drop another 70% in the following 11 months.

Following underperformance for most of 2023, CEO Jason Bailey started taking drastic actions to right the ship: He shut down several non-core initiatives and shifted resources towards core operations. In August of 2023, he also announced a major restructuring, laying off 20% of its staff. Profitability improved sequentially every quarter of 2023, and Jason turned on the buyback valve, repurchasing shares as aggressively as restrictions allowed. Lastly, EAGR won its lawsuit with Truly Social Games in December of 2023.

Why Own EAGR

So what exactly are you buying today?

• EAGR’s success in monetizing IP is leading to additional partnerships with multiple content owners. This model is not too dissimilar from many other companies (COTY, LANC, IPAR, etc.). Effectively, management is diversifying the risk from any one licensor, while almost guaranteeing the success of a game launch. Every time a property releases a new movie or a new season, an immediate bump in its # of downloads is seen, with no additional marketing cost. Management doesn’t have to spend years developing IP that has a 90%+ chance of failure, they simply capitalize on their relationships and sell their past track record of generating royalty streams.

• The focus on counter-culture content also means that the company can monetize niche IP with a loyal base that would otherwise generate almost no profit for the licensor. This is a win-win as licensors can generate extra high-margin revenue while it often leads to solid economics for EAGR. For example, Cheech & Chong have likely made more money through EAGR’s mobile games, than their movies, shows, or promotional products. It’s also worth noting that these IP partnerships are often too small for competing studios to care about and too big for start-ups to take on. Management has effectively secured a position in a niche market of the mobile gaming space.

  • In their most recent Q1 2024 call, Jason mentioned that content owners are hungry to sign deals. They also have a higher number of IP partners they can choose from and the economics of the deals have gotten materially better.

  • I also don’t want you to believe that they are solely reliant on external niche IP. After all, they secured high-profile IP for their games (The Office, Power Rangers). They are also having momentum with their properties. Two recent launches have been successful and are demonstrating record KPIs. This includes Bud Farm: Munchie Match and Milk Farm Tycoon.

• Despite significant revenue pressure, management has shown to be quite disciplined, improving EBITDA margin materially from <6.5% in 2022 to 19.7% as of Q1 2024. Many of the costs associated with launching recent games (AEW, Cheech & Chong, Power Rangers, Queer Eye) have been accrued yet margins continue to improve which leads me to believe there is still significant juice to their margin profile.

  

• Today, the company is generating a significant amount of FCF. With net income being a good proxy for FCF, I would expect them to generate 10m+ FCF this year. The mismatch between D&A and capex is coming down, driven by lower capex spent on non-core operations which is leading to a significantly cleaner EBITDA/FCF conversion and higher earnings. While many micro-cap companies lack capital allocation expertise and burn FCF into unprofitable endeavors, Jason seems to have understood the game: He is hoarding up cash on the balance sheet and using it to buyback as many shares as he can while valuation is depressed (but is limited by TSX volume limits). Here is a snippet from the Q1 2024 earnings call:

  

• You are buying a highly incentivized management team, with significant stock ownership: the board in aggregate owns 60% of the shares O/S, and Jason himself owns 50%. This does not include other/prior insiders who retain an additional 9% of shares. The board does not receive a salary and only receives option-based awards. Even looking at the executive team, salaries are reasonable and fair. Jason only pays himself $180K/year, the CFO is paid $150K/year and the rest of the management team has a salary in aggregate of $1.25m/year.

  • the IPO was set to be a liquidity event for insiders, but obviously, it did not go as planned. If the stock remains at a depressed valuation, I would not be surprised if the management eventually sells the company.

Catalysts

While the stock has rallied materially off the lows, I believe the market isn’t appreciating the number of initiatives that should materially accelerate revenue growth:

1. The company expanded its GameKit from only being able to release Idle games to Match3 games. Following the success of their first Match3 game, Bud Farm: Munchie Match (which has 500K+ downloads on the Play Store), a new one was released, Cheech & Chong: Kush Kingdom in May 2024. They soft-launched a new game based on the famous show ‘Queer Eye’ which will be released in Q3/Q4.

2. I believe they will be releasing a new RuPaul game as well given a senior artist job posting on LinkedIn by the company which hinted at it. (See pic below) - The first RuPaul game was widely successful with over 2m+ downloads on the Play Store and 46K+ reviews.

   

3. AEW: Rise to the Top idle game, was launched in January of 2024. The company also soft-launched in Q2 a new Power Ranger Idle game and hinted at 2 other launches in the back half of the year. Effectively, they will release more games in the next 6 months than they've released in the past 2 years.

Management has also hinted at an acceleration in their revenue growth for Q2:

This also seems to be corroborated with third-party download data for the Play Store: I tracked their top 11 games and these are the download trends (I removed the initial bump from new launches for comparability purposes):

We can see a clear acceleration into Q2 - this is likely a function of the incremental UA spend they mentioned in their Q1 call. The # of downloads would be significantly higher if I added new games recently launched (AEW and Cheech & Chong) and included the app store.

Valuation & Capital Structure

The company has a clean capital structure: 81.6m shares O/S and has bought back 1.3m shares it has yet to retire (for net S/O of 80.3m). they have 7.25m net cash and it should build every quarter.

In addition, there is a mismatch between current capex spend and D&A flowthrough to the P&L. I believe Q1 capex is more representative of what D&A should be in 2025 and beyond (1.2m in capex vs 2.4m in D&A expense in Q1). As legacy amortization flows through the P&L, I would expect it to add over 6c/share in EPS per year. Assuming no improvement in earnings beyond the normalization of D&A expense, earnings would be $0.155/share. The stock is effectively trading at 4.8x EPS (and close to 5x FCF ex-working capital movement).

Revenue has effectively stabilized around 20.8m since Q3 2023. Driven by their recent game launches and the qualitative commentary in the Q1 call, I believe the company should return to growth in Q2 2024 with a path to double-digit growth and $0.16-0.20 of earnings. using 8x EPS on $0.20 of EPS and 11m of net cash I expect them to have by EOY the stock’s fair value should be $1.74.

I truly believe my assumptions are conservative and the company could earn significantly more than $0.20c/share if any of their new launches is a hit. It is also not crazy to believe that the stock is worth more than 8x EPS.

Risks

• The disadvantage of their business model is the reliance on large studios that could pull the plug on the games. They also have minimum guaranteed royalty payments - if a game is not successful, it could hurt their profitability. ESG has been investing in mitigating these risks through multiple new partnerships as outlined above.

• Similar to all mobile game companies, there is a “fad” risk to most of their games. However, many of their games have proven their longevity. For example, Trailer Park Boys: Greasy Money was launched in 2017 and remains one of their top game, generating millions in revenue.

• Significant insider ownership; this could lead to a ‘take-under’. That said, the management seems to be doing the right things for stockholders. They’ve been buying back shares and focusing on growing earnings. I doubt this risk materializes.

Closing Remarks

The next catalyst for the stock will be Q2 earnings where they will likely provide additional details on the performance of their recently launched games and those still in soft launch. I would also expect them to provide additional details as it pertains to their UA spend and the impact on user growth and user retention.

Ultimately, you are buying a net cash gaming business, with inflecting growth and profitability metrics, trading at depressed valuations, and with a multitude of catalysts ahead.

Finally, I want to thank everyone who took the time to read this article. If you like the content I publish, please take a moment of your time to subscribe and follow me on Twitter @InflexioSearch

Disclaimer: I am long TSX:EAGR. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

JAKK & AGS have recently released their Q2 2021 results and I think it is fitting to revisit my positioning and some of my assumptions. I have also provided updates for each stock on my Twitter account. I usually provide quick updates when material events are announced, so make sure to follow me for timely updates!

PlayAGS (AGS) Update

For those who have not read my initial AGS pitch, here is the link.

The company reported its Q2 2021 results aftermarket on August 5th. Overall, it was solid. The thesis is playing out.

Premium Units Carve-Out

In the earnings call, the management team mentioned that their premium units already represent around 10% of gaming operations revenue. This comment helped me extrapolate revenue/day/units (RPD) contribution from premium units.

Note that RPD does not reconcile due to the installed base movement throughout the quarter. In addition, the company has a small number of legacy premium ‘Big Red’ units which I did not include in the analysis (the #s are not disclosed). Regardless, over $90 RPD for the premium units is phenomenal. The management reiterated that it is likely elevated right now and might come down. However, they are confident in keeping domestic RPD higher than pre-COVID levels.

Other Key Points

The second half of the year will likely surpass the first half. The replacement cycle is picking up and management sees improving equipment sales for the second half.

RMG grew 62% QoQ and over 110% YoY. The momentum is carrying into July. The company is launching various new products for their Table Products and will continue to focus on growth.

The “bad” stuff

Management believes that international RPD might take years to return to pre-covid levels. They are likely being conservative in their assumptions. I agree that international markets will be slower to recover than the United States. But, the chances of returning to a normalized RPD by mid-2022 seem plausible. Vaccinations are accelerating in other parts of the world. It is only a matter of time before borders re-open, despite the delta variant.

They also expect EBITDA margins in 2021 to be at the lower end of their 45-47% guidance as they reinvest for growth. Capex will also be elevated but still below 2019 levels. This is a good thing. The thesis revolves around their ability to take market share, which can only be done through investments.

New Valuation

Let’s assume a scenario where the installed base remains constant through 2022, but premium units grow from 520 to 1500.

This gets me to a stock price worth $14.08 or a 67% upside. Again, my estimates are conservative as management mentioned installed base would grow sequentially. In addition, EBITDA for Table Products & Interactive is lower than the current run-rate. I still believe PlayAGS’ stock to be undervalued. I am a holder of the stock at the current price.

What did you think of the quarter? anything I did not mention that you think is worth discussing?

Jakks Pacific (JAKK)

For those who have not read my initial JAKK pitch, here is the link.

JAKK’s results were outstanding, much better than what I had hoped for.

Key Points

• $2.9M outstanding on the convertible debt. Benefit Street Partners now own 1.356M shares. Interestingly, they also own ~4% of AGS. Great minds think alike...hopefully!

• LTM EBITDA now stands at $49.1M. We have yet to see Q3, which is their best quarter. Recall that Halloween last year was basically canceled.

• Supply chain constraints will likely impact the second half of the year, but the tone surrounding their ability to navigate these challenges was positive.

• The CFO believes they can still get more gross margin leverage and sees it creeping to the low 30s. As a reminder, the last time gross margins reached 30% was in 2016.

Sentiment on the Name

I have spoken to a few analysts in other value shops. It does seem like they are warming up to the story. Bloomberg shows that various institutions are now accumulating shares.

The sell-side has yet to warm up to the name. Funny enough, BMO & Jefferies continue to rate the stock as a “hold” and their target price lags the stock’s current price. Talk about being biased.

Both outline phenomenal execution from the current management team, yet refuse to upgrade the stock. BMO did not even ask questions on the last earnings call. Will they upgrade when the stock reaches a top? That gets me thinking: When is the right time to sell a stock like JAKK?

What Exactly is the right Valuation for JAKK? When is it time to sell?

JAKK is a difficult one. Its checkered history and unattractive business model make it difficult to justify it as a long-term holding. I am constantly asking myself “Ok, when is the management going to blow up the firm again?” That is why I have categorized this pitch as a special situation name.

I do not think JAKK’s multiple will re-rate to 8-9x EBITDA anytime soon. This type of multiple expansion could take years. The same way it took years for it to compress. The multiple will slowly creep up as they continue executing. Nevertheless, I think credit has to be given where it’s due. The business has transformed over the last two years and the new CFO is showing his worth. Anywhere between 5-6x EBITDA seems reasonable to me.

I will include the convertible debt as part of the total debt and assume full dilution for simplicity's sake. I do not assume PPP forgiveness. Preferred shares are included in the net debt calculation.

Here are my rough assumptions for EBITDA in 2021:

Remember that in Q3 2020, sales were down 13.5%. Halloween revenue was down 27.5%. The company could easily beat my Q3 & Q4 numbers. Regardless, using a 6x multiple on my current estimates gets me to a share price worth $23.38. With some margin of safety, the stock starts getting fairly valued at around $18-20. Obviously, I will re-assess if they blow my estimates out of the water.

JAKK is currently my largest position and I remain bullish in the short term.

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Disclaimer: I am long AGS & JAKK. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

PlayAGS (AGS) is a supplier of gaming machines, table products, and iGaming content. July’s market sell-off prompted me to take a closer look at the name and I think the market does not fully appreciate the strategic & growth initiatives put in place by the management team:

• Their recent entry into the premium gaming machine market could improve revenue/day by over 30%.

• New international geographies will help international revenue grow double-digit for the foreseeable future.

• Two fast-growing segments with attractive margin profiles provide optionality for investors.

The stock is also well-positioned to benefit from the economic reopening. I see double-digit EBITDA growth for the next 2-3 years and a $30 target price over the long run.

Company Overview

The company reports under three segments.

Electronic Gaming Machines (EGM)

This will be the focus of the story. EGM is the company’s largest segment, representing 91%+ of revenue. To put it crudely, EGMs are modern slot machines. The games are proprietary and developed in-house. AGS generally spends 10-12% of its revenue in R&D to develop new cabinets and games. Its cabinets fall into 2 distinct categories.

1. Core Cabinets - leased or for sale, include most of their proprietary titles.

2. Premium Cabinets - Leased only, with high-performing game titles and higher revenue per unit.

AGS either sells the machines outright at an ASP of ~$18,000 or leases the machines. The company takes 15-20% of the casino’s winnings or a flat daily fee through leasing.

Table Products & Interactive 

These two segments represent 9% of revenue. I will not spend too much time on them, but these segments provide interesting optionality in the long run.

Table Products include card shufflers, live felt table games, side bets, and other “add-ons” to table games. Side bets are attractive to casinos as the odds for the house are statistically better than your traditional betting games. The table industry has historically been a monopoly, controlled by Scientific Games. However, AGS is rapidly taking market share. I expect continued double-digit growth and market share gains.

Interactive is their B2B & B2C iGaming business. Their B2C business has performed well, but nothing too exceptional. B2B on the other hand is phenomenal. In 2019, the company launched its real-money gaming platform (RMG). If you are familiar with the iGaming sector, think of RMG as BRAGG & GAN. RMG is growing triple-digit and has run-rate revenue of $5.5M. Many of their cabinet games are easily transferable to an online format, creating meaningful synergies between each segment. The company is onboarding 11 new clients in Q2 2021 and is ready to launch in new jurisdictions. In a few years, RMG could be worth AGS’s current market cap.

Competitive Landscape

The EGM market is dominated by the “Big Three”: IGT, Scientific Games, and Aristocrat. Together, they control over 65% of the market. Starting in 2013/2014, these players went on a consolidation spree, acquiring important EGM manufacturers (like Bally and WMS). Customers sought to diversify their supplier base by awarding more floor space to smaller manufacturers. As seen in the company’s June 2020 investors presentation, market share from non-Big Three players has grown substantially. I expect this trend to resume as smaller players, like AGS, continue to penetrate the market.

Big Trouble in Little Oklahoma

PlayAGS was brought public by Apollo. As you would expect from a PE firm, AGS had a massive amount of debt. Initially, the business performed well, showing improved unit economics and a growing installed base. However, starting in 2019, it faced deteriorating unit economics in Oklahoma. Reasons cited were underperformance from 800 incremental Oklahoma cabinets and severe floods that shut down casinos. Revenue/day/unit (RPD) in Oklahoma dropped substantially and continued to be well below the company’s consolidated average for the remainder of the year. As seen in the table below, Oklahoma represented 55% of its installed base in 2019. 

If that was not enough, COVID hit when management initiated several strategic initiatives. With a ton of debt and clients closed indefinitely, the stock plummeted.

Strategic Initiatives

AGS’ management team worked tirelessly in 2020 to stabilize their business and position it for growth.

They used COVID as an opportunity to reset their installed base. By extensively looking at the ROIC of each cabinet, lower-yielding units were promptly identified and pruned out of their client’s casinos. In total, the company sold 1300 lower-yielding units, primarily in Oklahoma. This initiative should improve domestic RPD and reduce unnecessary CAPEX moving forward.

The company also launched its new Orion Starwall premium EGM and is set to launch a new Orion Curve premium package in the back half of the year. These machines generate higher levels of engagement and better RPD. The management team has a lot of room to improve their domestic RPD, which is currently the lowest in the sector as seen in the picture below. I will spend a little bit more time on this initiative in the following section through a case study of Everi. 

Mini Case Study -  Everi (EVRI)

Everi used to serve primarily the core cabinets market and both companies had similar RPD. EVRI, however, made an aggressive push to penetrate the premium market. As seen in the picture below, Everi’s premium cabinets installed base grew significantly from 2,859 in 2018 to now 6,478. RPD grew from $28.42 to a peak of $34.52 before falling in 2020 due to COVID. 

Similarly, AGS started to focus on the premium market in late 2019/2020. Management estimates that the premium market contains 70,000 cabinets. As of Q1 2021, the company only had 400 Orion Starwall cabinets installed, representing a 0.6% market share. As the company progresses through its strategic initiative, I would expect RPD to grow substantially, hitting a new high in 2022. Their Q1 2021 results have already shown considerable improvement from 2019 levels. If AGS can re-produce what Everi accomplished, we are looking at a 30-40% uplift in RPD over the next few years.

White space Opportunities & Catalysts

PlayAGS has quite a few interesting white space opportunities both domestically and internationally.

1. In Q4 2020, the company sold its first Historical Horse Racing (HHR) cabinet in Kentucky. The momentum continued in Q1 2021 with 65 additional cabinets going live. HHR units allow individuals to bet on past horse races (details of the race are presented in an anonymized way). By scouring through the Kentucky Horse Racing Commission’s reports, one can see massive growth in bets handled in 2020 and 2021. This is also true for prior years. Currently, only Virginia and Kentucky permit HHR. Management believes 2 new jurisdictions might legalize HHR in the coming 12 months.

2. The company’s installed base is highly concentrated in three geographies: Alabama, Florida, and Oklahoma. Pre-COVID, the company was expanding in new states. Its ship share, which is the % of total units sold attributable to AGS, outpaced its market share by a wide margin in nine states. Some people believe this trend might not be the same post-COVID, but I simply do not see any structural or fundamental issues that would prevent the company from taking market share.

3. International geographies are also an area of growth for the company. International revenue was growing significantly in 2019 (53%) and accounted for 15% of total revenue. The management team was making strides in new geographies. This included the Philippines, Argentina, Peru, and Asia. I see this trend resuming in the back half of 2021 as these economies re-open.

Additional short-term opportunities/catalysts include:

1. AGS is clearly a reopening trade and I would expect EGMs utilization to remain high for the remainder of the year as consumers unleash their wallets. Given their revenue share arrangement, AGS should directly benefit from this.

2. At the height of the pandemic, the management team took the prudent approach to shore up liquidity by taking out a $95M loan. Unfortunately, the interest rate was not advantageous at LIBOR+13%. The loan is likely to be refinanced in May 2022 at a much lower rate. For comparison, their two other loans bear interest rates of LIBOR+3.5%.

Competitive Positioning

Why am I so confident that PlayAGS can continue taking market share? Being a smaller player, AGS has needed to rely on innovation to gain an edge. As seen on the tables below, the company consistently spent more on R&D than its competitors relative to its top-line.

This continued to be true for 2020 as well.

I realize that R&D does not always translate into results. However, this metric, coupled with their previous ship rates, seem to indicate some sort of success. Naysayers will proclaim that bigger players spend 5-10x more on an absolute basis. I would argue history has consistently shown that smaller players can uproot incumbents by innovating.

Valuation

It is an interesting point in time to look at PlayAGS following July’s sell-off. Recall that the stock reached a high of $11.32 before dropping to its current levels. Currently, the stock trades at a discount to all other major players in the space. A discounted multiple is warranted given:

1. Their 2019 debacle (and its leverage)

2. Competitors are more diversified with interesting and bigger adjacent segments.

That said, I expect the multiple to slowly improve as the company progresses through its strategic initiatives. In addition, the growing Table Products & Interactive segments should provide valuation support.

Bloomberg’s 2GY EV/BEst EBITDA chart (Estimates on 2022’s EBITDA) shows a multiple that compressed from close to 11x at its peak to now 6.3x. In fact, AGS’s multiple was higher than many of its comparables before 2019. Note that the Bloomberg data differs from the previous table given a difference in diluted share count.

I won’t make a case for the multiple to return to 2018’s levels. But, let’s look at a scenario where everything works out as I would hope: The company’s multiple returns to 8x, RPD grows meaningfully and EBITDA margins return to 2019 levels.

For Table Products, I forecast decelerating double-digit revenue growth with stagnating margins over the forecast period as the company continues to take market share from Scientific Games. For Interactive, I assume high double-digit revenue growth and margins expansion to 30% by 2025. This seems reasonable given the industry is in its early innings.

With these assumptions, I get to $18.31 off of 2022’s numbers. The 5-year target price gets us to a three-bagger.

Obviously, the above scenario could prove to be wrong. As such, I modeled a “subdued” scenario. EBITDA for the EGM segment is forecasted to return to 2019’s levels in 2025. I reduced my numbers for both the Table Products & Interactive segment and kept the company’s multiple at 7x EBITDA.

As you can see, I am not really shooting for the stars here. AGS has an interesting upside despite conservative assumptions. Reality will likely fall in between my two scenarios.

Key Risks

• Slot machines have been in a secular decline for a while. Lower interest from younger generations, growth in alternative gambling (like sports betting), and the proliferation of online gambling are all contributing to this trend. While I do think this is likely to continue, AGS can continue to grow by taking market share. And, with an embedded option in two attractive segments, the risk seems to be worth taking.

• The company currently has 531M of net debt. TTM net debt/EBITDA stands at 7.4x. Obviously high, but distorted by the impact of COVID. If one uses 2019’s EBITDA, the company stands at 3.6x, which is manageable. I also believe the recurring nature of their business allows for a higher debt load. The company’s CEO has made it clear that debt reduction will be a priority coming out of COVID.

• Apollo still holds 21.7% of the shares outstanding. I usually dislike investing in firms with a PE overhang. However, the company filed a secondary offering on July 2nd for the totality of the shares held by Apollo. They should be exiting imminently.

• COVID delta variant. Yes, we aren’t done with COVID, unfortunately. Masks mandates are being re-implemented and there is a risk that restrictions could follow.

Closing Remarks

The company is scheduled to release its Q2 2021 results on August 5th. I want to emphasize that PlayAGS is NOT a Q2 2021 earnings play. The results should be good given incremental casino reopenings and growing tourism. However, there are still uncertainties surrounding the delta variant and demand for cabinets.

Finally, I want to thank everyone who took the time to read this article. If you like the content I publish, please take a moment of your time to subscribe and follow me on Twitter @InflexioSearch

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Disclaimer: I am long AGS. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

Digging through 40+ letters can be tedious and I seek to alleviate this for you by compiling what I believe are the best ideas. Solid under-the-radar investment managers provide interesting ideas within their quarterly letters, and I will focus on them. I do not discriminate between long/short ideas but will always focus on small/micro-cap stocks. I will be trying out this concept over the next few quarters, posting the ideas on the last business day of the month following the quarter-end.

I want to emphasize that I will not be conducting an in-depth analysis of each stock. Rather, I will summarize the key points and leave it to you, the reader, to determine if the idea is worth pursuing. I will also try to stay away from letters that massively move small/micro-cap stocks (Altafox, Kerrisdale). Feedback is welcome.

Long Idea by Greystone Capital Management: Thunderbird Entertainment (CVE:TBRD)

I initially found TBRD through a Twitter account I follow, @everyonehatesp1. The individual started a blog as well, providing in-depth analysis on various micro-cap names (with a niche focus on insurance). I highly recommend you check out everyonehatespoetry’s substack.

More recently, Greystone Capital Management profiled the company in their quarterly letter. Thunderbird is a production and entertainment studio. Mr. Wilk argues that movie studios are generally bad businesses. They rely on blockbuster hits to gain traction and most studios spend millions of dollars on IP that generate little to no profit. TBRD, however, has been able to circumvent that. Here are a few key points:

1. Canadian Tax Credits for content creators typically cover almost 75% of the production costs. In addition, the company’s projects are usually pre-sold to streaming platforms before major costs are incurred. These two factors significantly de-risk its business model and insulate TBRD against project flops.

2. It has developed successful franchises: Atomic Betty, Kim’s Convenience, Highway thru Hell, among others. The company also owns an economic stake in well-known franchises, such as Blade Runner and The Last Kids on Earth.

3. TBRD is backed by a solid management team and has Frank Giustra, Lionsgate’s founder as a shareholder. Mr. Giustra currently owns a 14% stake in Thunderbird.

The company’s top line and bottom line are growing double-digit but the stock trades at 10x EBITDA. If you would like to further pursue the idea, I have included the original tweet that leads to Greystone’s quarterly letter.

Long Idea by Immersion Investments: Basic-Fit (AMS:BFIT)

Immersion Investments profiled Basic-Fit NV in their inaugural quarterly letter. Basic-Fit operates low-cost fitness clubs across various European countries. Immersion believes the stock to be both an interesting value and growth story for the following reasons:

1. COVID's impact and growth initiatives have masked the company’s strong unit economics.

2. The management team aspires to grow its footprint from 973 units today to 2000 units by 2025 and serve over 5M individuals.

3. Two comparables trade at a significant premium to BFIT. Pricing the company is at half of its comparable’s multiple could make this name a three-bagger by 2025.

To tie it all up, Bit-Fit is managed by Rene Moos, a former professional tennis player. Mr. Moos has founded several fitness centers and currently owns 16% of the company. The letter delves deeper into the company’s unit economics and some of the key risks to the thesis. I encourage everyone to read it. The letter can be found via the tweet below.

Long Idea by McIntyre Partnerships: Garrett Motion (NASDAQ:GTX)

Chris McIntyre from McIntyre Partnerships appeared on the investing podcast “Yet Another Value Podcast” in May, profiling the stock following the company’s bankruptcy. GTX is a turbocharger supplier for major OEMs. Here are a few key points:

• Garrett operates in an effective duopoly and enjoys a significant MOAT around its turbocharger business. Many believe turbochargers will quickly become obsolete from the advent of EVs. However, Chris makes a solid rebuttal, believing the market will actually grow in the medium term before declining.

• Following a “non-fundamental” bankruptcy, GTX now trades at a steep discount to peers (BWA, CON GY) despite growing well above the auto market sector.

• The stock has virtually no coverage, and institutional interest is low. This should pick up as they continue to print solid results.

For those interested, GTX released their Q2 2021 results on July 29th. I encourage you to go through the earnings call as many of Chris’ points are validated by management. He has also uploaded a PowerPoint presentation with his key assumptions. McIntyre Partnerships quarterly letter can be found in the tweet below.

Long Idea by Laughing Water Capital: TransAct Technologies (NASDAQ:TACT)

Laughing Water Capital profiled TransAct Technologies, a legacy hardware business that is quickly transitioning to a software-based business model. Some of his key points include:

1. The company’s legacy hardware business sells printers that issue tickets in casinos and racetracks. The industry is structured as a duopoly and a stringent regulatory approval process creates strong barriers to entry. This is a high-margin business that generates significant cash flow and helps fund their new business;

2. BOHA, the company’s foodservice technology, is both a POS system and a data-driven software that helps restaurants manage inventory, monitor food & equipment. TACT has a sales partnership with Apple and the company’s pipeline grew to $140M as of the latest quarter.

3. Their POS/Software platform trades at a meaningful discount to other players in the space. The management needs to continue executing for the multiple disparities to shrink, but recent data points are promising.

If you would like to further pursue the idea, I have included the original tweet linking to Laughing Water’s quarterly letter. He has other interesting names within the letter.

Short Idea by East 72 Holdings: Sezzle Inc (ASX:SZL)

Andrew Brown, Executive Director at East 72 Holdings provided his clients an in-depth analysis of Sezzle Inc, a ‘‘Buy Now, Pay Later’’ financing company based in Minnesota, but listed in Australia. East 72 questions Sezzle’s business model through seven components. I will highlight two of them.

1. Sezzle’s lending practices are poor. Nearly 60% of its losses over the past four years are linked to credit losses. While most other fast-growing companies attribute the majority of their losses to sales & marketing, Sezzle has only spent $7M in marketing expenses (and that will increase significantly). Delinquency trends in 2021 are similar to the second half of 2020 and continue to be elevated.

2. Sezzle’s funding structure allows merchants to re-invest the proceeds from a sale into Sezzle’s facility at a LIBOR+3% rate. East 72 argues that this is not common practice and is likely a way for “unbankable” merchants (e.g. marijuana retailers, escort services, etc.) to park their money. While this is not illegal, the company might not be sufficiently well-funded to repay merchants, which hints at continued rounds of equity offerings. The company might also lose some of these assets if the U.S. legalizes marijuana at a federal level.

To tie it all up, East 72 argues that hardly any investors have dug deep enough to uncover some of the ugly stuff due to its Australian listing.

If you would like to further pursue the idea, I have included the original tweet linking to their quarterly letter (press on it to see the link).

Disclaimer: I do not have a position in any of the aforementioned securities. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

Following years of mismanagement, JAKK is now ready for launch thanks to a new CFO doing God’s work: a death spiral convertible debt has been cleaned up, they refinanced their debt, margins have improved and we are seeing a significant rebound in their business. The stock is trading at a 4.8x EBITDA multiple despite its closest comparable trading at 8x

Company Description

Jakks Pacific develops and sells toys & costumes, primarily for content creators. The company’s business model has historically capitalized on licensing existing IP (e.g. They held the rights to Frozen to make costumes). Jakks’ licensing agreements usually contain minimum royalty guarantees; if the company does not meet a certain sales volume threshold, they are on the hook for the minimum royalty payment. They wholesale their products, which are in turn sold to retailers. The company is known for its partnerships with Disney, Nintendo, SEGA, and Black+Decker. JAKK’s 2019 revenue breakdown was as follows: 50% girl toys, 20% Halloween costumes (important), 15% seasonal products, 13% boy toys, and 2% preschool toys. 30% of their revenue is derived from Walmart and 21% from Target.

Background On The Stock

JAKK was founded by late toy pioneer Jack Friedman & current CEO, Stephen Berman. Mr. Friedman’s intended to consolidate the toy industry, create exclusive licensing agreements and make Jakks pacific a powerhouse in the sector. Following years of success, the company ended up losing one of its key licensing agreements (WWE) and all went downhill from there. The company started to become unable to meet their royalties agreements, which deteriorated their balance sheet.  

Mr. Berman took over from Friedman in 2010 and his lack of experience in the role only made things worse: in a bid to save the business and protect Friedman’s legacy (my opinion), the CEO agreed to many unprofitable licensing agreements, which led to deteriorating profitability. He refused various takeover offers and spent money on useless investment bankers that were unable to find a better buyer for JAKK.  On the brink of bankruptcy, the CEO took a desperate measure to save the business; he agreed to refinance Jakk’s pacific debt through a death spiral convertible debt. For those unfamiliar with the death spiral converts, they work as follows: The initial conversion price resets periodically. So, if the stock is 50% lower at the time of the reset, your new conversion price is also 50% lower. However, for JAKK, the reverse was not allowed; if the stock price jumped, the conversion price remained the same. This deal was catastrophic for shareholders and became an overhang on the stock. Over the next few years, JAKK continued to bleed, its balance sheet deteriorated and most institutional investors saw Mr. Berman as one of the least capable CEOs in public markets.

That started to change when at the end of 2019, the company hired Mattel’s previous CFO, John Kimble. Mr. Kimble started working vigorously on the company’s issues. The company hired a consulting firm to help them overhaul their cost structure, from sourcing to shipping (Mr. Kimble discusses it in detail in the Q3 2020 earnings call). They have started switching from a wholesale model to a direct-to-retail model in Europe. The company now believes it can now be profitable with evergreen products alone.

Finally, while Mr. Berman remains at the helm of the company, which many see as a problem for the stock, I believe the near-death experience of Jakks Pacific has made him a better CEO.

Catalysts

On June 3rd, 2021, the company refinanced its debt. The new debt has a principal of $99.0M and an interest rate of LIBOR+6.5-7.0%. While this is still high, it will be used to pay down the outstanding $128.9M, 10.5% interest rate term loan facility. The company expects to generate $5M in annual interest expense savings. This is extremely important, as $5M in debt repayment per year equals $0.50-$0.60 in share price accretion per year. More importantly, this refinancing triggered a key covenant: it accelerated the maturity of the convertible debt to September 1st, 2021. I expect the holders to convert their debt and dump them in the market over 91 days as they are not allowed to hold more than 4.9% of the common stock as per their agreement with JAKK. As such, expect a volatile stock until that date. However, this removes a significant overhang and will likely improve the liquidity profile of the stock.

The company also received backing from a prominent player in the toy space: Lawrence Rosen. Mr.Rosen has been accumulating shares and now owns 522K shares. He was the founder of Cra-Z-Art and currently acts as the chairman of the board. This signals to me that smart money is getting into the stock.

The next catalyst relates to their disguise (costume) business. Their costume business was hit hard by COVID. Generally, their third quarter, which coincides with the celebration of Halloween, is their best quarter. Following last year’s cancellation of Halloween, parties, and other events due to COVID, I expect a strong rebound in 2021. 

Finally,post-Q3 2021, we should see continued strength in their business. Why? COVID has delayed the release of many movies that JAKK could have benefitted from. It seems like the slate of content for 2H2021 and 2022 will be one of the best ever, and JAKK should be able to capitalize on that given their relationships with major content creators.

Valuation

Before I get into the valuation, I want to spend a little bit of time on JAKK’s closest comparables. Many individuals look at Mattel and Hasbro as JAKK’s comparable. That said, both Mattel and Hasbro operate multi-billion dollar franchises that are not tied to licensing agreements, and this reduces significantly the lumpiness/risk of their businesses. Funko Inc (FNKO), a public comparable, resembles a lot more JAKK. Funko relies heavily on new content to drive growth and has agreements with major content creators as well (Disney). Funko has a history of blowing up their results following quarters with a minimal amount of new content (see Funko’s Q4 2019) and relies primarily on wholesaling its Pop! Collectibles. Funko trades at 8x EBITDA. I believe this is where JAKK could trade if they continue executing.

My valuation for JAKK is quite simple: In our dream scenario, JAKK trades at 8x EBITDA. Given the rebound in their Q3 results, they are likely to generate $45M+ in EBITDA, which gets us to a $29 stock. On the flip side, even if we use TTM EBITDA of $39.6M, and sticking to our 8x EBITDA multiple,  it gives us a stock worth $25, and even at 6x EBITDA, the stock would be worth $17.

Why does this Opportunity Exist?

Jakks pacific is hated. Plain and simple. The company came up in various toy industry sell-side discussions. The sentiment over the CEO’s past performance is so negative, that one analyst I spoke to said that he would go to his grave before upgrading JAKK to a buy if Mr. Berman remains at the helm of the company. In addition, their death spiral convertible made it impossible for any reasonable long-term investor to accurately gauge the risk as any short-term weakness in the stock could have a devastating effect on the share count.

Risks

Risks to our story have been discussed above. These include:

• The current CEO is, I believe, disliked on wall street, and negative sentiment on JAKK might persist despite a turnaround in the business

• Short-term volatility as the owners of the convertible debt will unwind the stock

• The company has a history of failing to deliver on its royalty licensing agreements. This could happen again. However, from my discussion with the IR department, the CFO has been doing a phenomenal job in renegotiating some agreements

• Major customer concentration (Walmart and Target)

Disclaimer: I am long JAKK