Re: Pokemon and KIDE
Alex Berenson at TheStreet.com sez:
Media/Entertainment
No Kidding: 4Kids Shares Put a Bigger-Than-Life Value on Pokemon
By Alex Berenson
Senior Writer
11/8/99 6:00 PM ET
URL: thestreet.com
Pokemon is a big fad.
A big, big fad.
But is it a $100 billion fad?
That's the bet that shareholders in 4Kids Entertainment (KIDE:Nasdaq) are making as they bid up the company's shares to ever-more ludicrous heights.
In case you haven't noticed, Pokemon is an animated Japanese game from Nintendo that has become the biggest hit among American kids since ... well, since Tamagotchi, another animated Japanese toy that came and went about two years ago. But forget Tamagotchi. Pokemon is the real thing. Since hitting U.S. shores last year, Pokemon has spawned the inevitable hysteria from school principals and the inevitable commercial tie-ins. The inevitable movie is due out this week.
The Good News
All of this is very good news for 4Kids, which holds the rights to license Pokemon outside Asia. For the quarter ended June 30, 4Kids earned 31 cents per share, up from 2 cents per share a year earlier. (4Kids is set to release earnings for the September quarter around Nov. 12.)
And investors have taken notice. Since a TSC story in March highlighted the company, 4Kids stock has posted an incredible tenfold increase in price, accounting for two stock splits. The company now has a market capitalization of nearly $1 billion.
Putting the Squeeze on Pokemon
Sharp rise in 4Kids short interest shadows the stock's remarkable run
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Source: Nasdaq
Unfortunately, even some onetime 4Kids fans say the party may be just about over. Russell Anmuth of Gotham Holdings, who once owned as much as 3% of the company's shares, sold the last of his position over the summer. "At these prices, it's all risk," Anmuth says.
Why? Time for a corporate tutorial -- and a little math.
The Middle Ground
4Kids works as a middleman between copyright owners like Nintendo, which owns Pokemon, and companies that want to license characters and trademarks for toys and other products. Besides Pokemon, 4Kids represents World Championship Wrestling and Comedy Central, and the company also has a couple of smaller business lines.
But Pokemon, an interactive game in which children collect a universe of 150 "pocket monsters," has been the driver of 4Kids' earnings -- and its stock. 4Kids admitted as much in its most recent earnings release, saying that its increasing profits "primarily reflect the exceptional growth in the Nintendo Pokemon licensing program."
Unfortunately, that exceptional growth means much less to 4Kids than most investors realize. Remember, all 4Kids does is connect Nintendo with the companies that want to make Pokemon-branded merchandise and tie-ins. For this, 4Kids gets a golden crumb, a piece of Nintendo's licensing fee.
How big a piece remains unclear, since 4Kids has never publicly disclosed what its royalties are. But Anmuth says Chairman Alfred Kahn told him that 4Kids gets about 3% of Pokemon's wholesale sales. 4Kids Chief Financial Officer Joseph Garrity confirms that the company's fee is between 1% and 5% of wholesale sales.
Add It Up
Now for the math. Assume 4Kids' non-Pokemon properties are worth around $100 million, a generous figure considering that the company as a whole was worth $40 million at the beginning of 1999. So Pokemon must account for the remaining $800 million-plus in 4Kids' market cap.
At first, that figure doesn't seem so strange, given Pokemon's popularity. But if 4Kids gets only around 3% of Pokemon's wholesale sales, and retailers usually mark up products like Pokemon by a factor of two, every $10 a kid spends on Pokemon means only 15 cents to 4Kids.
Now, much of that money should flow straight to 4Kids' bottom line, but the company does have expenses, including deals with Kahn and Garrity that together entitle the men to 12% of 4Kids' pretax income. In addition, 4Kids has to pay taxes, which totaled 40% of its net income last year.
So, of the 15 cents 4Kids receives on a $10 Pokemon sale, Kahn and Garrity get around 2 cents, and local and federal governments get another 5 cents. That leaves 8 cents for 4Kids shareholders. Give or take.
Now multiply those figures by a factor of 10 billion, and voila: For Pokemon to justify 4Kids' current market cap, its total retail sales would need to be $100 billion.
$100 billion. That's a patently ridiculous figure, more than the total worldwide sales of music and movies combined this year. 4Kids won't discuss its projections for sales of Pokemon merchandise but says it's very happy with the response the character has generated.
Of course, 4Kids is trying to develop new lines of business to prepare for the inevitable cooling of Pokemon, but entertainment fads are inherently difficult to predict, and even 4Kids fans agree this stock is a Pokemon story.
Short End of the Stick
"Incredible is a kind word," says one West Coast short-seller, who calls 4Kids' valuation "insane." This person shorted 4Kids stock last week in advance of the release of the Pokemon movie, scheduled for Nov. 12. His strategy is to short stocks a few days before a major positive news event that's already well known to investors (and thus presumably already priced into a company's stock).
So far, though, Pokemon has been a graveyard for shorts, who sell stocks they don't own in an effort to buy them back later at a lower price. 4Kids' sharp rise has forced many shorts to cover their positions, and the resulting demand has pushed its stock even higher.
"This is not about [4Kids], this is not about Pokemon," says Anmuth of Gotham Holdings. "This is about a scarcity of stock. This stock is overborrowed. ... This is the mother of all [short] squeezes." (For an explanation of how short squeezes work, click here.)
4Kids surely deserves kudos for recognizing the potential of Pokemon, and the company has done a great job profiting from the game's wild popularity. But at this point the numbers just don't add up.
"Our job is to run the company as the best way we see fit and to maximize the returns, and the stock price will take care of itself," Garrity says. Indeed. |
