• 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

Subscribe now

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.

Subscribe now

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

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.

Subscribe now

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.

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.

Subscribe now

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.

Subscribe now

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.