Contra the valuation of Fanatics

I don't play a Venture Capitalist on Substack, but I will occasionally criticize third-party deals.

So one of the potentialities of this Newslettr was talking about Venture Capital deals.

Unfortunately, doing so directly turned out to be impossible. There are a wide array of regulatory issues regarding content that can be construed as “promoting investment”, and there are an equally wide array of ethical issues related to discussing private negotiations publicly. In short — talking about companies I might invest in is in the area between “straight news”, “politics”, and “opinion” where there is a giant flashing “go away” sign.

Fortunately, there are far fewer regulatory or ethical issues regarding talking about companies I have not invested in. Unless I know private information, there is simply the guideline of “be kind”. And, unless somebody has signed up for an Argument Clinic, it is quite rare that kindness rises to the level of saying anything.

---

In the case of Fanatics, the kind thing to do is to point out that the emperor has no clothes.

The company recently raised $1.5 billion at a valuation of $27 billion. (ref. CNBC). It has two main lines of business. Unfortunately, from my point of view, both are worthless at this time.

Clothes Horse

Fanatics sells branded merchandise. In other words, clothing with sports logos on it.

However, they offer so many discounts that we must assume their marginal sale is at a net loss¹.

Selling clothes for less than you pay for them is a business model. It is a “too big to fail” business model. Unfortunately, that isn’t a viable business model here. One company that tried this strategy was called Steve & Barry’s. They expanded while selling clothes at a loss. And then … *drumroll* … they failed.

The various Intellectual Property owners will be happy to license to someone else if Fanatics fails. And, while I have not seen any of the contracts, I assume they are structured so that the NFL can license its IP to other entities if Fanatics sets a floor price of $200 for a New York Yankees T-Shirt.

So, the Fanatics clothing business is in the category of “not too big to fail … no matter how many billions they raise”. They look to be “lighting money on fire”, to use a colloquialism. Presumably it looks more sane from the inside, where one can see the plan to actually make money on every transaction.

Physical NFTs

Fanatics is also in the trading card market. They outbid Topps for the rights to issue various sports league trading cards. Then, they bought the rest of Topps for $500 million.

The combination is apparently valued at $10 billion. This is nonsense. To spell it out, this is the combination of a liability, and a company with a book value of no more than $500 million. And it is in a business sector (NFTs) that we know² is in a bubble. In short: somebody overpaid.

Nobody wants trading cards anymore. “Kids these days” cannot possibly be interested. Cards from the 1990s can be purchased in bulk at well under one cent per card. When you buy new cards at retail³ today, they will presumably be worth the same “less than a cent per card” if you hold onto them.

And as far as investors who want to get into “the NFT space”, I’m not going to listen. If you are paying twenty times what something is worth, it’s not going to end well.

Leading Man

When evaluating an investment of a new company, one question that must be asked is “when was the company founded”. When the answer is “that is not well-defined”, you must step back, worry for a few minutes, and then do more research.

The main person behind the company appears to be a certain Michael G. Rubin. There are a lot of corporate transactions here, but the oldest predecessors appear to date to the 1990s. CNBC claims the company was founded in 2011, and in its current form that may be as good a date as we can get.

I have never met Mr. Rubin, but after a brief investigation: he is a salesman through and through, and I doubt I want to learn any more.

Enron Re-born

So, we have one business that is probably losing money, and a second business that is definitely overpriced. When they are combined under the management of a charismatic fundraiser, that apparently makes them worth $27 billion to some people.

To me it is worth $0. Exactly zero. You would have to pay me to take on the shares as a liability — I would not accept them if they were offered for free.

Of course, from a purely financial perspective, there is optionality value. The company may not go bankrupt once the bubble bursts. It may change course before bankruptcy. And the latest investors certainly have preferred stock and would likely not lose everything in that scenario.

But valuing dead companies⁴ is an unpleasant business. We would prefer to value the company at nothing, and let other people argue about the details later.

1. No, they can not make it up in volume. Ref GitP. Also, no, I do not have a rigorous financial model spelling this out. If you don’t believe me, do your own research. Or don’t, it’s not like you can short-sell a privately traded company anyway.

2. Ok, have it your way. There is no bubble. Web3 is going great.

3. When people talk about valuable sports cards from the past 20 years, they are talking about gimmicks. They don’t actually sell any of the valuable cards in retail — you have to buy them at auction. Those artefacts are generally limited-edition, signed, graded, and have features like “a game-worn jersey patch”.

4. For more information on dead parrots and other stiffs, the Newslettr advises you to watch Monty Python’s Flying Circus.