4Kids IS Pokemon. They hold a seven-year license (from 1998) for marketing this laser-hot children's franchise powerhouse everywhere outside of Asia. Asia, by the way, is where Pokemon has seen its deepest penetration. Oh, well. 4Kids gets royalties on the recently released Pokemon movie, the cards sold by Topps, the Hasbro toys, in fact everything EXCEPT for the video games manufactured by Nintendo. If it says Pokemon and doesn't say Nintendo, 4Kids gets royalties on it. Unless you're in Tokyo. Or Shanghai. Or Singapore. Or Jerusalem. Or Karachi.
Clearly this is a company that's got the proverbial tiger by the tail. It's also got some other licenses, including World Championship Wrestling, the number two wrestling franchise, but these are a mere pittance compared to Pokemon. And Pokemon is a fad. And like all fads, Nintendo, Hasbro, Topps, and 4Kids are rightfully going to ride it as hard as they can for as long as they can. So why, in December, the month in which 4Kids ought to be doing its victory lap, has the share price dropped faster than Cabbage Patch Kids futures? Parents are out right now, stalking the toy delivery trucks, ransacking Burger Kings for the Pokemon du jour, enduring the Pokemon movie (threateningly subtitled "The First Movie").
So what is the problem? 4Kids, for all of its other properties, is a one-trick pony. And that trick is Pokemon, a property that 4Kids neither owns nor controls. The company receives no revenue from video games released by Nintendo, which are the biggest-ticket items, and more importantly, the ones that drive the popularity of every other Pokemon item. Therein lies the rub for 4Kids.
For a company to justify a high price-to-earnings ratio, or a high price-to-sales, it had best have a secure moat around its business. 4Kids doesn't even have a moat WITHIN its business. They have a marketing agreement with Nintendo lasting for seven years, meaning that in 2005, the vast majority of 4Kids' earnings could disappear, lest Nintendo, the tiger, re-up its deal with 4Kids.
And why should they? Pokemon is a self-actualizing marketing product. If 4Kids does a bad job marketing it, then Nintendo would be justified in letting the contract lapse. But if they do TOO good a job? Same problem. Nintendo then has a product line on their hands that they can market themselves, and would not have much need for 4Kids. In fact, I'm not sure why Nintendo felt the need to go to an outside marketer in the first place. It's not like Nintendo hasn't plowed these fields before. But they did, and 4Kids is the beneficiary of that decision.
So, even after the big drop in share price, 4Kids is valued at 38 times this year's earnings, and 13 times sales. This latter figure means that at current sales levels, the company would take 13 years of revenues to equal its market capitalization -- and revenues is the number that does not take into account such annoying little details as taxes, salaries, marketing, COGS, or any other expenses. The company is going to have a big Christmas this year, no doubt about it, so that number, which does not include the current quarter, may not be the best to base future performance off of. After all, given the Christmas-heavy, cyclical nature of 4Kids' past earnings, leaving off the current quarter, well, it wouldn't be fair.
Last year 4Kids' sales increased 3x between the third and fourth quarters. Let's just use that same multiple for this year, giving the company a current revenue level of $50.4 million. That, coupled with the last three quarters, would give the company a price-to-sales ratio of 5.5. Well, that's better, but it's still really rich for a company that has such a tenuous hold on its cash-king product. Five more years just like this one, in which the company keeps every penny in sales, and we're just now, after the big drop in share price, getting to the point where the ratio equals the length of 4Kids' contract with Nintendo.
I haven't really touched on the other properties that the company has, because, well, they don't matter very much. WCW (and by the way, in the only really indignant slap I will take, how dare a company called 4Kids market that garbage to children?), along with WWF, have captured the fancy of the country right now. Although wrestling has a rich and glorious history, I have a hard time being convinced that this won't burn bright and fade fast, dragging the value of any marketing agreements with it.
No, 4Kids is all about Pokemon. And Pokemon is burning white hot now, just as Furbies did last year and Tickle-Me-Elmo the year before that. Teenage Mutant Ninja Turtles. Cabbage Patch dolls. Transformers. Hula hoops. All of these things had boom cycles and then burned out. They went from buy-at-any-price, must-have accessories for kiddos to something that got overmarketed, overhyped, overblown and then, just plain over. Very few of these types franchises have kept kids' attention for that long. We could point to Ty's Beanie Babies as an exception, or maybe Star Wars, but there is a huge difference. Beanie Babies' speculative nature and the rage that continues unabated is largely driven by adults. Really delusional adults, but adults nonetheless. Ditto Star Wars, which captured the fancy of people of all ages.
Pokemon, on the other hand, is going to have to regenerate interest from people of the 6- to 12-year-old range. For although there are some hard-core Anime fans (well, that and 100 million Japanese people, but that doesn't help 4Kids, as I explained earlier) of all ages who do like Pokemon, the majority have had the reaction of rather having their teeth drilled than sit through the Pokemon movie again. Pokemon at the dentist -- talk about a real alternate version of Hell. George Orwell would be impressed.
And that is the final, most crucial risk that faces 4Kids. They have to depend on the notoriously unpredictable and fluid tastes of prepubescent kids to keep their gravy train on the track. If Pokemon becomes too ubiquitous, it runs the risk of becoming "lame" or "last week" or whatever kids use to describe yesterday's news these days. If 4Kids has figured out what kids tastes will be for the next five years, well, God bless 'em, they deserve every penny they get. But if they misstep, or the wandering sands of children's tastes blow a direction that they did not predict, the fall is going to be hard and fast.
Attempt to predict what kids are thinking? Better to try herding cats.
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