By Senad Karaahmetovic
Shares of Hasbro (NASDAQ:HAS) are down more than 6% in pre-open Monday trading after Bank of America analysts double-downgraded to Underperform from Buy as a result of the firm's deep-dive on the company's business "Magic: The Gathering."
The price target is slashed to $42 per share from $72, implying a downside risk of over 30% relative to Friday's closing price of $63.41.
Magic: The Gathering, which is a trading card game, generates about 15% of Hasbro's total revenue and as much as 35% of EBITDA.
"We've spoken with several players, collectors, distributors and local games stores and have become aware of growing frustration. The primary concern is that Hasbro has been overproducing Magic cards which has propped up Hasbro’s recent results but is destroying the long-term value of the brand," Haas said in a client note.
In order to maintain high growth in this business after the pandemic, Hasbro came up with more frequent set releases, more products in each set, and wider distribution. However, this strategist has likely backfired, Haas warns.
"Players can't keep up and are increasingly switching to the "Commander" format which allows older cards to be used. The increased supply has crashed secondary market prices which has caused distributors, collectors and local game stores to lose money on Magic. As a result, we expect they'll order less product in future releases," the analyst added.
Moreover, Haas notes that the price for Magic 30th Anniversary set, set at $999 for four booster packs, is "excessively high."
"This has created panic among collectors and we're seeing collections being liquidated now that the scarcity value of Magic is in question."
Bank of America analysts are also growing increasingly cautious on Hasbro's Consumer Products segment amid "negative read-through from retailers and peers."