It is no secret that Hasbro Inc. (HAS, Financial) has been struggling amid the ongoing high inflation environment. Toys and games fall firmly in the “non-essentials” category, so as the costs of groceries, gas and housing have soared, Hasbro experienced an 8.77% revenue drop in 2022. This has prompted the company to slash its workforce by 15%, which means productivity will likely be lower going forward.
However, the company has a bold plan to catapult it back to success, one that it has been spending big money on. Hasbro plans to undertake the quest of making more money off of Dungeons & Dragons, which it believes is under-monetized. If it can succeed in this endeavor, its stock price could exit the 40% freefall it has been in for the past year.
Changing the playbook
D&D was first published in 1974, and it has been operating under Wizards of the Coast since 1997. Wizards of the Coast was acquired by Hasbro just two years later in 1999.
For most of its history, D&D has taken a laissez-faire approach to its brand, in which anyone is free to use D&D’s basic mechanics to create books, spinoff games and other products targeted towards D&D fans. Something shifted in 2022, though, after D&D experienced a renaissance in popularity due to the Covid-19 pandemic. This brought the game into the spotlight, and Hasbro decided to end D&D’s open-source approach and implement stricter licensing controls.
Unfortunately for Hasbro, there was a lot of pushback from D&D’s player base regarding the licensing changes, with many players even calling for a boycott. A petition called #OpenDND gained 67,000 signatures, and players were cancelling their subscriptions to the company’s recently acquired online toolkit D&D Beyond. The pushback was so fierce, in fact, that Hasbro apologized and backtracked on the licensing changes.
However, the open-source approach is not the only reason why D&D is under-monetized. Another reason is because most D&D content is created for Dungeon Masters, who make up a small fraction of the player base. There is typically only one Dungeon Master per game compared to several character players. Thus, the company has an opportunity to market more toward players.
A broader approach
Given the pushback on licensing changes, the makers of D&D will have to solve their under-monetization problem in other ways, which will likely consist mostly of various ways to broaden the game’s audience appeal and monetization methods. What the franchise needs is fresh ways to reach out to both new and existing players and engage them with content designed with profitability in mind.
One of the ways the company is doing this is with its big-budget film, "Dungeons & Dragons: Honor Among Thieves," which releases on March 31. There is also an upcoming live-action D&D series being developed for Paramount Global’s (PARA, Financial) Paramount+ streaming service. These expensive moves are aimed toward drawing new players to D&D and helping to keep existing players engaged.
D&D has also finally broken in on the subscription model. In April 2022, it acquired D&D Beyond from Fandom for $146.3 million amid frustration that many third-party companies were making killer profits off of D&D’s resurgence in popularity while Hasbro itself was not really raking in the dough. D&D Beyond is the official digital toolset and game companion for D&D, and it rapidly gained popularity due to the difficulty of trying to keep up with the game’s many rules on paper.
In a fireside chat near the end of 2022, Hasbro CEO Chris Cocks and Wizards of the Coast CEO Cynthia Williams discussed D&D’s under-monetization. According to the CEOs, their focus will be to create a digital “recurrent spending environment” with D&D Beyond and the upcoming official virtual tabletop version of the game, which will be available cross-platform on PCs, consoles and mobile devices.
Valuation and takeaway
If Hasbro’s efforts to turbo-charge D&D pay off, it could serve as a catalyst for the stock. Hasbro already looks undervalued based on its forward price-earnings ratio of 11.76 (according to earnings estimates from Morningstar (MORN, Financial)).
In addition to the potential catalyst from D&D, Hasbro’s consumer products segment, which consists of its toy brands, should someday recover alongside the economy.
The GF Value chart does warn that, while Hasbro looks undervalued, it could be a possible value trap. In this case, the value trap warning appeared because of Hasbro’s poor balance sheet strength. The company has a cash-debt ratio of 0.12 and an interest coverage ratio of 2.51, meaning it cannot afford any further declines in operating income.
Overall, it seems that Hasbro has a lot riding on its efforts to better monetize D&D, not just in terms of long-term growth, but also in terms of shoring up its balance sheet in the short term. This puts the stock’s risk-reward profile a big on the extreme side. The good news is, the virtual tabletop is probably the single best thing the company can do to reach a broader audience and monetize the full range of players rather than just the Dungeon Masters.
