Topps NFT Debut: Will It Boost the NFT Market?

Topps to Go Public Through SPAC Merger

Recent reports indicate that Topps, a company widely recognized for its collectible trading cards, is preparing to become a publicly traded entity through a Special Purpose Acquisition Company (SPAC) merger.

The financial terms of the reverse merger establish an equity valuation of $1.163 billion for the combined entity. This valuation places Topps within the category of privately held startup companies valued at over $1 billion – a so-called “unicorn.”

A Unique Position in the Tech Landscape

Topps’ business model incorporates both e-commerce and digital components, leading to its categorization as a “digital commerce” company. This positioning is notable given the current market trends.

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Why This Matters

The significance of this development lies in the overlap between Topps’ customer base and the growing community interested in creating and collecting rare digital assets on blockchain technology.

This public offering can be interpreted as a means for investors to gain exposure to the NFT market without directly engaging in cryptocurrency purchases or speculative trading.

Beyond Trading Cards: Topps' Diverse Portfolio

Interestingly, Topps also holds a portfolio of assets within the confectionery industry, adding an unexpected dimension to its business.

Valuation Considerations

Let's examine the details of the Topps offering. A key question arises: is the company’s current valuation based on its existing, stable business performance, or is it driven by anticipated revenue streams from potential future NFT-related ventures?

Understanding this distinction is crucial for assessing the long-term viability and potential of the investment.

The analysis will involve a detailed review of Topps’ financial performance and a careful evaluation of its strategic plans for leveraging the growing NFT market.

Trading Cards: An Overview of Topps

Topps is a multifaceted company comprised of several business segments, categorized into four main areas: Physical Sports and Entertainment – encompassing trading cards – Digital Sports and Entertainment – including digital collectibles, applications, and games – Gift Cards – offering gift cards for various brands – and Confections – focused on candy production.

The company’s physical products and confectionery divisions currently generate the majority of its revenue. The following data illustrates this financial distribution.

Financial Performance and Growth

Notably, Topps experienced a significant increase in pro forma adjusted EBITDA, nearly doubling between 2019 and 2020. This represents substantial growth in adjusted profitability. The physical sports business demonstrated a nearly 50% increase during the same period, contributing significantly to the company’s overall positive performance.

Forecasts for 2021 indicate that Topps anticipates the ongoing popularity of collectibles. This surge in demand can be attributed to similar factors driving interest in meme stocks – a surge of capital and attention directed towards previously niche items like baseball cards.

Topps is positioning itself to capitalize on the continued speculative interest in rare trading cards, hoping to broaden market engagement with its product lines. Consider this slide from their SPAC presentation:

Diversification and Partnerships

Topps possesses certain strengths, including diversification across multiple sales channels. Furthermore, the company is actively expanding its intellectual property portfolio through strategic partnerships.

Collaborations with major brands like Marvel (2018), Disney (2019), and Formula 1 (2020) demonstrate this commitment to broadening its reach.

However, the primary driver of investor interest in Topps likely isn’t the projected 22% revenue growth to $692 million in 2021, or the anticipated 100 basis point decrease in its pro forma adjusted EBITDA margin to 15%.

The NFT Opportunity

Instead, attention is focused on this:

The presence of the blockchain logo is significant.

Topps entered the NFT space in 2020 with its digital Garbage Pail Kids collection. The company plans to leverage its existing properties and licenses to create “incremental revenue opportunities” through blockchain technology.

This strategy involves generating revenue from both initial sales of digital items and subsequent resale transactions. Marketplaces are a viable business model, and a thriving NFT trading ecosystem already exists.

Potential Risks and Considerations

However, if the expectation of Topps successfully navigating the NFT landscape proves unfounded, and the anticipated revenue gains from digital tokens don’t materialize, the company’s growth projections – which include “conservative blockchain assumptions” – could be at risk.

Currently, the digital business accounts for 5.5% of total revenue, or $31 million in 2020. The company projects this to increase to 6% of estimated 2021 revenues, reaching $41 million. This represents a modest increase.

Notably, Topps anticipates its candy business will generate 70% more revenue this year than its entire digital operation.

Conclusion

The Topps SPAC presents a unique investment opportunity. While the company has demonstrated reasonable revenue growth and possesses attractive margins in certain areas, much of the excitement surrounding it stems from the potential of the NFT market.

For investors bullish on NFTs, Topps may be a compelling option. However, those less convinced of the company’s ability to succeed in the digital token space may find it difficult to justify an investment, particularly given the availability of other options within the SPAC market.

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