Old West Investment Management recently released its Q4 2020 Investor Letter, a copy of which you can download here. In 2020, the fund’s LP strategies returned an average of 65% and its SMA strategies returned an average of 66%. You should check out Old West Investment Management’s top 5 stock picks for investors to buy right now, which could be the biggest winners of 2021.
In the Q4 2020 Investor Letter, Old West Investment Management highlighted a few stocks and WildBrain Ltd. (NASDAQ:DHXM) is one of them. WildBrain Ltd. (NASDAQ:DHXM) is a media company. Here is what Old West Investment Management said:
“As readers of our quarterly letters may recall, WildBrain is a global children’s content and brands company. They make children’s cartoons and television shows and distribute their content across broadcast platforms, streaming platforms, and on their advertising-video-ondemand (AVOD) network, WildBrain Spark. For a second income stream, WildBrain then licenses all the consumer products based on their programs. At the time of our original writeup, DHX Media / WildBrain was a starter position in the portfolio. Although our timing was a bit premature, our conviction has continued to grow, and today it is a sizeable position in most of our strategies.
In August 2019, DHX Media named Eric Ellenbogen as the company’s new CEO. We oftentimes view management change as a catalyst to unlocking value, and we definitely believe that to be the case in this situation. Ellenbogen, who had served as an advisor to the company for the prior year, has an incredible and proven resume in kid’s content and for developing franchise IP. Ellenbogen was the President and CEO of Marvel Enterprises before its acquisition by Disney. He then co-founded Classic Media, which became one of the largest private owners of branded kid’s and family entertainment. Classic Media was acquired by DreamWorks Animation in 2012, and Ellenbogen became the Co-head of DreamWorks Classics and DreamWorks International Television. One of Ellenbogen’s first moves as the new CEO was changing the corporate name to WildBrain, the name of its child-focused YouTube business which was renamed WildBrain Spark. For the last several quarters Ellenbogen has been busy putting the right management in place, and we believe getting the company ready to emerge as a global leader in kid’s content.
As you can imagine, luring a top-notch media executive and creative talent away from a larger company is not cheap. A big name usually comes with a big cash salary which would not meet our investment criteria of only investing in companies led by management teams with high stock ownership and shareholder friendly compensation. That’s why Ellenbogen’s compensation package made us all the more excited. Half of Ellenbogen’s pay package is in the form of cash salary (1/3rd of which he is required to use buying stock on the open market), and 50% is tied to stock grants. Half of those stock grants will vest over a period of three years and the remaining fifty percent will vest as follows: 1/3 on the achievement of a stock price target of $7.00; 1/3 on the achievement of a stock price target of $9.00; and 1/3 on the achievement of a stock price target of $11.00. As of the time of this writing, WildBrain common stock is trading at $1.75. So yes, Eric Ellenbogen stands to be nicely compensated, but at stock prices 300%, 414%, and 529% above where the stock is currently trading. This alone should tell you something about his optimism regarding the company’s assets and potential, and he offered a clearer picture into the future during this most recent quarter’s conference call. The Peanuts franchise + other library content + consumer product sales + the massive advertising opportunity at WildBrain Spark + the ability to discover and partner with new IP at WildBrain Spark that could evolve into hits = many different ways to win big as a WildBrain shareholder.
I. Continued Success with Peanuts Franchise / Apple TV Partnership
Peanuts is WildBrain’s “tentpole” property and the success of the Peanuts gang demonstrates that franchise brands can live on and prosper for years into the future.
Peanuts was created as a comic strip in 1950, and today, 70 years later, kids are still discovering the brand every day. Owning various media names over the years, I have learned that profits from content production are often surprisingly low due to massive marketing budgets and other production related costs, and the only proof that a brand is “Evergreen” should be proven out in high margin consumer product / retail sales. Most entertainment brands simply lack consumer product sales which I believe either indicates the lack of a forever franchise or management’s ineffectiveness at monetizing IP.
As you can see in the chart on the next page, Peanuts is the #8 entertainment / character property with over $1.6 billion in annual global retail sales. These attached consumer products act like “oil wells” that never cease pumping cash, and include everything from the sale of toys, music publishing, school supplies, health and beauty aids, food products, etc. The #9-character property on the below list, Peppa Pig, was the primary asset acquired by Hasbro last year in a $4 billion acquisition, which is a good comp for what that the Peanuts franchise may be worth. WildBrain owns a 41% controlling stake in Peanuts (Sony owns 39% and the Shultz estate still owns 20%), which means that WildBrain’s stake in the franchise alone is probably worth multiples of the current stock price.
Despite this success, we believe that the Peanuts franchise is significantly under-monetized and will become much more valuable in the coming years due to the new Apple TV+ / Peanuts partnership. The newly announced partnership is transformational and will give the Peanuts franchise a fresh make-over and will make the brand more relevant than ever. The partnership with Apple TV+ is the largest content deal in WildBrain’s history, making Apple the new home for all of the Peanuts content. The full impact of new Peanuts content for Apple TV+ will not reflect in WildBrain’s financials until 2022, but the entire value of the back-catalogue license will aggregate in the upcoming quarter, which will be on the order of 60% more than what was last publicly reported in the transaction between Iconix (former peanuts owner) and ABC Television in 2014.
The new “Snoopy in Space” series in partnership with NASA that premiered last fall was one of Apple’s most viewed shows and recently renewed for a Season 2. “The Snoopy Show” premieres in February of this year, and a series of holiday specials (Mother’s Day, Back to School, Earth Day, etc.) will premiere in the coming year and complement the existing Halloween, Thanksgiving and Christmas specials that were licensed in the backcatalogue deal. Most recently, Mariah Carey’s “Magical Christmas Special” topped the Apple TV+ charts at #1 in over 100 countries and was watched by tens of millions of people. If you happened to watch the Christmas Special with your family, you will know that Snoopy, Woodstock, Charlie Brown, and the rest of the Peanuts gang had one of the more prominent guest appearances. As this new content reaches new audiences and new generations of kids, and as Apple continues to build its kids’ streaming content with Peanuts as its anchor property, management expects the existing Peanuts licensing business to grow significantly.
II. Vast Potential with Other Owned IP
Management has stressed that the new Peanuts/Apple TV+ content is a creative magnet unlike anything the company has ever seen. The prospect of working on an iconic animation property like Peanuts for Apple TV+ is attracting top talent to the studio, thereby establishing a virtuous cycle which will reignite other key IP from its vast portfolio of popular brands. Several of these programs have been licensed to SVOD platforms (streaming-video-on-demand) like Netflix (Johnny Test, Chip and Potato), several are being introduced and/or grown through WildBrain Spark’s AVOD network (Strawberry Shortcake, Calliou, Rev & Roll, etc.), and others through linear broadcast (Dorg Van Dango on Nickelodeon, etc).
Management has singled out several franchises for redevelopment that have impressive operating histories and legacies of significant consumer product sales. Two such examples are Strawberry Shortcake and Teletubbies.
- Strawberry Shortcake: Strawberry Shortcake, which was purchased from Iconix Brands in May 2017, is being re-developed and re-introduced on WildBrain Spark, WildBrain’s AVOD network of channels. In the 1990’s Strawberry Shortcake was first introduced as a one-hour home video produced for 20th Century Fox Home Entertainment for $250,000. Over the next five years, Strawberry Shortcake did $5 billion of retail sales with 300 licenses and 600 products in the marketplace distributed worldwide.
- Teletubbies: Teletubbies is another franchise with a rich history of retail sales. On Ellenbogen’s first conference call in mid-2019, he discussed a new 360° approach to brand development to fully capture higher margin consumer product sales. On that call, Ellenbogen highlighted that Teletubbies, a beloved preschool property, had done less than $1 million in consumer product sales in the prior year. During the early 2000’s Teletubbies was doing several hundred million dollars per year in retail sales.
As the fan base continues to grow for these two brands on their dedicated WildBrain Spark channels, premium content deals will be announced, which should then ultimately lead to consumer products strategies not too different than they experienced in the past. If WildBrain is able to replicate past success, it is not unreasonable to believe that these brands could be worth in excess of WildBrain’s current valuation. Outside of these brands, several other properties in WildBrain’s library have exciting potential, including Green Hornet, Carmen Sandiego, In the Night Garden, Calliou, Rev & Roll, Johnny Test, and many more.
III. Significant Opportunity at WildBrain Spark
The largest and most exciting opportunity in our opinion is at WildBrain Spark, WildBrain’s advertising-video-on-demand (AVOD) business on YouTube, Amazon Fire, Roku, Tubi, etc, and as this segment continues to grow, the market should assign a much higher multiple to the overall company valuation similar to other digital media assets.
As the market transitions from a linear broadcast centric market, digital media platforms have become the most popular destinations for kid’s entertainment. YouTube has led the way grabbing close to 20% of viewing time. With more than 200 million subscribers on YouTube, WildBrain Spark has over 300,000 videos under management across more than 800 kids’ channels for both its own IP and for 3rd party brands. The WildBrain Spark network generates approximately 4 billion views per month and reaches 1-in-3 kids – about 40% of kids under the age of 13 – globally on YouTube every 90 days. We believe that WildBrain Spark is a “breakout business” that will become a meaningful growth engine and may ultimately become the most valuable business segment at WildBrain.
1. Significant Advertising Potential at WildBrain Spark
WildBrain Spark offers brands and media agencies scale and reach backed by data-driven insights and the ability to monitor brand safety as a YouTube designated “Made for Kids” creator of content. With such a large network of channels and content, WildBrain Spark is uniquely positioned to offer advertisers more control over and insights into the videos carrying their ads. This gives WildBrain the ability to sell ads at much higher CPM’s (3x or more) compared to YouTube’s advertising algorithm.
WildBrain Spark has a very compelling pitch for advertisers of kids and family content. The Spark network has an average of 4 billion viewers per month compared to Nickelodeon’s TV network with 1.3 M daily viewers, Disney’s TV network with 760k daily viewers, and Cartoon Network with 640k daily viewers.
In WildBrain’s most recent conference call, management expressed that they expect to monetize the advertising opportunity beyond what they were doing prior to YouTube’s algorithm change in 2019 when the FTC mandated that Google make changes on how it places ads in children’s content (Google has moved swiftly to respond by making the necessary changes – emphasis on quality, removing channels, etc – to evolve into a safer environment for kids. This in turn has only increased Spark’s already dominant kids position on YouTube). Prior to this change, WildBrain Spark was doing $80 million in revenue and growing 25% annually. We believe that Spark will most likely return to and eclipse this growth as watch time and viewership continue to grow.
- Advertising Case Study: Mattel’s Cave Club YouTube has changed the way in which kids and families identify popular toys, and in 2020, Mattel partnered with WildBrain Spark to develop and execute a digital-first launch strategy for a new kids’ property, Cave Club. This digital-first strategy is designed to introduce audiences to the brand, build excitement ahead of a retail launch, and to create a fandom to sustain and grow Cave Club’s popularity for the long-term. In less than one year, WildBrain Spark has helped Mattel’s Cave Club receive 60 million views and the response to the advertising campaign has been 110% above industry benchmarks.
2. Ability to Build IP and Discover/Partner with 3rd Party Brands.
In addition to growing awareness for its wholly owned IP, dozens of 3rd party brands like Playmobil, Curious George, The Smurfs, and Popeye have turned to WildBrain Spark to develop their AVOD strategies. Ellenbogen has referred to WildBrain Spark as a brand builder that can help the company identify and then partner with new content that kids want. WildBrain’s analytics tools can test new and unproven content, see what is gaining views, further build successful IP, and then partner with those content creators to oftentimes gain an ownership interest or consumer products share. This in turn can potentially build WildBrain’s library of IP, increasing the overall value of the company.
- Brand Building Case Study # 1:
Woody Woodpecker WildBrain partnered with Universal to test select brands from Universal’s content library that had been largely ignored for decades. WildBrain launched Woody Woodpecker YouTube channels in Brazilian Portuguese and Spanish. The channels immediately resonated and the dedicated Portuguese channel for Brazil was a breakout hit. The Brazilian channel organically attracted over 2 million subscribers and the Spanish channel over 700,000 subscribers coupled with extremely high engagement and watch time. This is leading the way to build upon the strength of the existing IP and a strategic opportunity to create original content.
- Brand Building Case Study # 2:
Sunny Bunnies After Season 1 in Russia, the official Sunny Bunnies YouTube channel had just 1,200 subscribers. Wanting to expand the brand to a much wider audience, the creators, Digital Light Studio, approached WildBrain to grow its global reach. WildBrain’s team helped transform the official Sunny Bunnies channel from 1,200 subscribers, to a top 1% global YouTube channel. WildBrain was able to generate more than 600,000 views per day on average and grew the channel to 325,000 subscribers and 1.88 billion minutes of watch time. Leveraging this success, the Sunny Bunnies brand has secured a master toy partner and earnings from the channel have funded further content to support the brand’s future growth.”
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