Magic The Gathering’s Wild Investment Scene

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.

Wizards of the Coast kind of has a policy of never publicly acknowledging the price market that goes with their cards, as to not admit that they print $100 bills on paper and put them in plastic packs. I think if they do ever actually rescind the reserve list, it could cause a financial collapse in the Magic market.

Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe. The voice you just heard in that crowded room, that's Zach. He's an attendee at an event for something called Magic: The Gathering, which is a card-based role-playing game. And if you've never heard of it, you might be surprised to hear just how big of an earner it has become for toy maker Hasbro. And as Zack's mention of a financial collapse in the Magic market suggests, the game has attracted financial speculators. In a moment, we'll look into that and why one analyst turned bearish on Hasbro shares this past week, sending them sharply lower. And I'll explain why I see a parallel between Magic Mayhem and the crypto crash. Listening in is our audio producer, Jackson. Hi, Jackson.

Hi, Jack.

We sent you out into the world this past week as a field correspondent. You put your personal safety at risk to bring us to what far-flung locale?

Yeah, it's called the Mock Sporting House in Seattle. They've got board games, about 2 dozen beers on tap.

Only 2 dozen? It sounds like difficult conditions.

I was going there because it's a popular hangout for Magic: The Gathering players. I went to something called the Brothers' War Pre-Release Draft.

What is that?

Whenever Hasbro releases new Magic cards, shops throw events so players can try out the cards before they buy them. And the Brothers' War references a pivotal story in Magic lore. A war erupted between the brothers and planeswalkers Urza and Mishra that set into motion—

not so quickly, I'm writing this down. Go ahead.

And set in motion the future of the multiverse itself. And this artifact-based deck is filled with mythic creatures, 3-meld pairs, and prototype cards.

And when you say planeswalkers, Are you talking about the people who walk down the aisle when they're doing the beverage cart so the steward or stewardess has to stop and—

No.

Okay.

The point is that the release events are happening more frequently. I heard a few years ago they'd typically be around 4 releases a year, but just looking at the schedule, I see Jumpstart 2022 in December, Dominara Remastered in January, Phyrexia: All Will Be One in February, then March of the Machine and March of the Machine: Aftermath.

And if there's an April release, it should be called Floodplains of Brand Dilution. That issue, it came up near the end of Hasbro's earnings call last month.

There's some investor concern that there's maybe been too many Magic releases in a short time frame. There's some talk of wallet fatigue among the players out there. We've seen the secondary market prices come down a bit. So I'm curious, just what's your response to that concern that there's just a lot of Magic product coming all at once?

That's Jason Haas from BofA Securities. He had a buy rating on Hasbro at the time of the call, and the response to his question came initially from Hasbro CEO Chris Cox.

Well, we've had great growth for Magic: The Gathering. You know, since I started back in 2016, the business has almost tripled. And as I said, you know, we're up through the first 9 months of this year by 5%. And, you know, the general gaming category is down by most measures close to double digits.

He's basically saying that Magic is making a lot of money, which doesn't really answer the question of whether it's overdoing the releases. Cynthia Williams gave more of an answer. She's in charge of the division that includes Magic.

We did have one of our products sort of slip out a little bit into Q3, which was Infinity. That was a supply chain issue. But other than that, our releases that are coming up for this year with Brothers' War, with our Secret Lair drops, which are direct-to-consumer, our Magic 30th Edition is also direct-to-consumer. They've just shifted a little bit in timing due to some supply chain issues.

Cynthia is saying that a supply chain hiccup scrunched up some of the release dates, but otherwise everything is normal. Jason from BofA must not have been fully convinced because this past week he downgraded the stock straight past neutral to underperform, and the stock lost 10% in a day. Jason explained his reasoning in a note to investors titled Hasbro is Killing Its Golden Goose. He wrote, Hasbro is overproducing Magic cards, which has propped up recent results but is destroying the long-term value of the brand. Card prices are falling, game stores are losing money, collectors are liquidating, and large retailers are cutting orders. Okay, Jackson, let's hear from some of the people you spoke with in Seattle.

Sure. Well, first there was Aaron, who I asked about these new releases.

Yeah, I'd say it changes the dynamic. It makes it a little bit harder for new players to get in, especially when sets come out. Every 2 months now, and it's really hard for people to get into the game because they have to keep buying more cards to keep up with the sets.

Then I spoke with Tyler about buying cards, specifically the lottery nature of buying packs.

Have you ever gambled? You know, you know, the rush when you're just like, I'm going to do this thing. I don't know what the outcome is going to be. And that, like, act of not knowing what you're going to get, that's just the smell of cards, the crinkling of the foil of the It's like a little bit of Christmas, right?

I like that about the foil crinkling. It does sound like Christmas. Who else do you have?

Then I met Christine, who has a son Walter, who's 12.

He just happened into it with a group of friends at school, and they all became complete enthusiasts. And the thing he loves most, I think, is coming here with friends and trading and just building these decks of these very valuable cards.

Okay, so you got Walter's mom. What about Walter?

Yeah, I met Walter and his friend Robert. They come to the store once, maybe twice a week, and they buy packs of cards and then they'll look for the valuable cards and then sell those cards back to the store so they can buy more packs.

9, 10, 11, 12, 13, 14, 15. Usually every time I come to mocks, I get some cards.

Like today, I'm going to split a box. With one of my friends.

How about Zack? We heard from him at the top of the episode. He mentioned the possibility of a financial collapse in the Magic market.

Yeah, and he also described some of the speculative activity he's seen.

I knew a lot of people who had purchased hundreds of copies of cards because they thought this card would blow up because of a tournament, and then it did. And then that card goes from $3 to $60 overnight. The finance portion is enormous. There's a crazy amount of money to be made in this.

Zack also talked about the controversy around something called the Reserve List.

This is a list of cards that are not to be reprinted. The reason is because there's an agreement, you know, not in writing or anything, gentleman's agreement between Wizards of the Coast and the community not to reprint these cards as to affect their price and their rarity. Too much, and there's a list. It's called the reserve list. It's like the forbidden list. Well, they decided to reprint some of these cards in this 30th anniversary reprint set, but they printed all of the cards with a different Magic: The Gathering back to indicate that these are not legal for tournament play. You can't trade them the same way. They're not supposed to have the same value. And then they price the booster packs at $1,000 each.

I had already heard about these $999 packs last year. A person I know asked me about how to start investing, and he said that crypto looked too risky, and I agreed. Then he said he was saving his money for now in Magic cards, and I said, what now? It turns out there's a lively Magic investor scene. The rapper Post Malone told Howard Stern last year that he had paid $800,000 for an artist-signed Black Lotus card. Sounds like a lot, but keep in mind he can now add 3 mana of any color to his mana pool. Black Lotus is one of the rare cards on what's called, as he just heard from Zack, the Reserved List, and they were thought to be out of print. Well, I ran into the same guy with the Magic Card Savings a few weeks back I don't imagine his portfolio is thriving, but then again, the basic stock and bond index funds that I had recommended have probably done about as well this year as a 60/40 split of necromancers and elder dragons. Anyhow, he mentioned that Magic is releasing some of its rarest cards in a 30th anniversary pack for $999, and I thought but didn't say Won't that make them less rare? If anyone is thinking to themselves, Hasbro has huge brands like Nerf and Transformers and My Little Pony, why are we talking about a little card game? It's because it's not so little. Magic was launched in 1993 as a portable game that convention attendees could play in between browsing comic books and such. It's a story-rich game where each player has their own identity in the form of the unique deck of cards that they've assembled. The company that owned Magic at the time, called Wizards of the Coast, did so well that in 1997 it was able to buy a much better known role-playing game called Dungeons Dragons. In 1999, when Hasbro paid $325 million for Wizards of the Coast, News reports mentioned Dungeons Dragons and the company's Pokémon trading cards, but they mostly ignored Magic, which somehow has managed to be both low profile and wildly popular for years. Anyhow, Magic just became Hasbro's first billion-dollar brand, meaning it brings in that much each year. It's about 15% of total company revenues and Profit margins on the Magic business are much higher than they are for Hasbro's toy unit, to the point where Magic now brings in more than one-third of company profits. Jackson, am I turning this into a round of Magic the Blathering?

I'd play that game.

How about we take a quick break and then hear more from the Magic fans you spoke with and take a closer look at the B of A downgrade and what I think might be a crypto connection. Sounds good. All right. In the meantime, I want to hear more about the January Dominar release. And also, who'd win in a fight between an orc and a goblin?

How much time do you have?

I got about 20 seconds.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.

Are you crinkling Magic cards over there?

No, that was Popchips.

Everyone's a winner. I'm just imagining you're surrounded by like empty packs of Magic cards.

Welcome back. We briefly mentioned declining prices for Magic cards. I want to give you some specifics using 3 of the most expensive cards. Black Lotus was last quoted at $26,500, down 42% this year. That's for a standard card, not one signed by the artist like Post Malone said he bought. A card called Timetwister recently went for $9,500. That's down 26%. And Mox Jet went for $7,770. That one's only down 9%. Must be a defensive holding. Those prices come from mtggoldfish.com, which is kind of like Standard Poor's but for Magic cards. So why are prices falling? A bunch of theories come to mind, and some combination of them seems likely. Risky assets in general have gotten clobbered as interest rates have gone up. That includes crypto and non-fungible tokens and special purpose acquisition vehicles and shares of companies that are fast growing but don't have a clear path to profitability. Basically, when interest rates were near zero for the better part of a decade, The cost of gambling was low and risky assets soared. And now that rates are rising, investors can earn a few percent on their cash and they're becoming pickier about what they buy. Prices for Magic cards on the Reserved list collectively peaked in spring of last year, which is around when the third stimmy or pandemic stimulus check hit direct deposit accounts. Now I've heard plenty of anecdotes about stimmy recipients gambling with the money, but— that's difficult to show with any clarity. What's clearer is that cryptocurrency prices peaked around this time last year. I'm a crypto skeptic, as I've said many times in this podcast, and I'm not about to recommend Magic cards, but I would argue that if you made easy money a year ago in crypto and you traded some of it for Magic cards, you've moved up in the weird finance capital structure, not down. At least Magic cards come with a game and backstory and community. I mean, crypto has a community, but I'd kind of rather sit next to two Magic players debating how to use a Sphinx of the Setting Sun card than hear a crypto bro lecturing about decentralized finance. Wasn't all finance decentralized before the creation of money? I feel like centralized finance is the bigger innovation.

Where was I? You're talking about why Magic card prices are falling, right?

Maybe it's just because Hasbro has been releasing a ton of them, and the $999 anniversary set, which releases on November 28th and includes some of the rarest Magic cards, is particularly controversial. On one hand, the cards have different backs than the original, so you could argue that Hasbro isn't quite reissuing cards from the Reserved List. On the other hand, why would that make these cards worth $999 instead of the more typical $5 or so a pack? And on the other, other hand, 5 years ago Magic's head designer was quoted as saying, "We are unwilling to reprint Reserved List cards at normal card size regardless of border or back." The new release seems to contradict that statement. So if you call these 30th anniversary cards re-releases, then the concern is card dilution. And even if you don't, you might be worried that it will lead to endlessly escalating prices on new releases and ruin the game. Some investors have had enough. Well, I'm asking everybody to please not purchase it. That's Rudy the Magic Guy. He has a popular YouTube channel called Alpha Investments And he calls the anniversary set a "Hasbro scam." He says he refuses to do an unboxing video when it comes out, even though he's confident it would get a lot of views. The 30th anniversary cards aren't tournament legal. And by that I don't mean that you'll get hauled off to Wizard Jail for using them. You just won't be permitted to use them in a sanctioned Magic event. And that gets to another point. Players who are more interested in the game than the investment component can just make their own rules rather than chase after new card sets. Remember Aaron at Mox Boarding House who was telling Jackson about the frequent new releases?

Here's how he's handling it.

Uh, yeah, I still play Magic. I play like Commander formats and draft formats for the most part now. I've been dropping out of like a lot more like constructed formats for competitiveness. And whatnot like that, like Modern and Vintage and stuff like that, just because I just feel like it's not really worth it anymore for me, you know. There's a big, like, power creep going on and kind of need to get out of that complexity creep almost, you know.

Aaron mentioned Commander format. That allows players to use older cards that aren't allowed in Standard play, which reduces their need for new cards. It could be a good fit for players who don't want to keep spending. Jason from B of A says that his field research suggests players are increasingly switching to Commander mode. He also says that 7 of the last 8 Magic releases have declined in value and that some stores that sell the game are cutting back on inventory. UBS released a bullish note this past week basically siding with management's argument that the brand is thriving and any recent release choppiness will work itself out. We'll see who's right in the quarters ahead. Two last things to note about Hasbro. The stock valuation seems undemanding at 13x this year's earnings forecast, but then this year's earnings forecast is 10% lower than last year's earnings. Hasbro is expected to reverse that decline next year. Also, It might seem strange that Dungeons Dragons is so much more widely known than Magic, at least among people born in the 1970s like me, but that it makes relatively little money. It's about the cards. With D&D, you just need one player to serve as what's called a Dungeon Master using any old rulebook and dice. A lot of the game is just storytelling. With Magic, players cultivate decks of cards to match their personalities and strategies. And that can mean ongoing purchases. But Hasbro has a plan to earn more from the D&D brand starting in Hollywood. There's a movie coming out starring Chris Pine from the Star Trek film reboot. It's called Dungeons Dragons: Honor Among Thieves, and it releases at the end of March. Thank you— oh man— Aaron, Tyler, Walter, Walter's mom, Walter's friend Robert, Zach, Rudy the Magic Guy, and Post Malone's investment advisor. And thank all of you for listening. Jackson Cantrell is our producer and field reporter and occasional host. Speaking of which, Jackson, I'm casting a 5-mana Thanksgiving spell that gives me next week off, and it requires you to figure something out. I know it's going to be magic, lowercase m.

I think I'll play my rerun card.

See you in 2 weeks. Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you.

Morningstar, where data speaks.