PLBY Group: Playboy And The Metaverse Could Imply Significant Stock Undervaluation

David Klein/Getty Images Entertainment

PLBY Group, Inc. (NASDAQ:PLBY) is the owner of the brand Playboy. Market expectations are quite beneficial because management is implementing a new direct-to-consumer and digital business model, which could send net revenue north. Also, with several recent acquisitions and traders discussing how virtual reality could affect the stock price, in my view, PLBY could receive significant attention in 2022. If interest in the stock grows, I believe that stock demand could push the stock value to more reasonable price levels. Under my DCF model, the fair price is higher than the current market price.

PLBY Group

PLBY is the owner of Playboy, which is said to be one of the most recognizable brands in the world. It is expanding its reach into new territories and launching games. In my view, investors who didn’t know that they could get financial exposure to the brand may be very interested.

Last year, PLBY acquired several businesses, which may commence to deliver synergies from 2022. I decided to run extensive due diligence after I observed the optimism about the acquisitions reported by management in a recent 10-Q:

We are accelerating our growth in company-owned and branded consumer products in attractive and expanding markets in which we have a proven history of brand affinity and consumer spend. Additionally, we have acquired and launched this past year our own direct-to-consumer online sales channels, yandy, loversstores and pleasureforall, in addition to playboy, to further accelerate the sales of these products. Source: 10-Q For the quarterly period ended March 31, 2022

This year we are assembling the pieces acquired in 2021 to create a scalable foundation for our transformed business and the omni-channel consumer ecosystem we are building is expected to drive substantial recurring revenue for long-term, sustainable and meaningful growth. Source: 10-Q

Management also reported that the company is involved in a process of transformation to become a direct-to-consumer and digital business model. In my view, it is the right time to have a look at the business.

The Metaverse And The Expansion In China And India Could Make The Company Worth $22 Per Share

I assumed that the direct-to-consumer commerce business continues to grow. Given that the global sexual wellness market is expected to grow at a CAGR of 12.4%, and the PLBY is a global leader, PLBY’s sales growth will likely be larger than 10%-12%:

We are focused on three key growth pillars: first, accelerating our direct-to-consumer commerce business, where we target an 18-34-year-old consumer base with Sexual Wellness and Apparel offerings. Source: 10-k

The Global Sexual Wellness Market size is expected to reach $125.1 billion by 2026, rising at a market growth of 12.4% CAGR during the forecast period. Source: Global Sexual Wellness Market Analysis and Forecast

With that about global sales growth, in my view, PLBY’s sales growth will likely be larger than that of the market. Keep in mind that PLBY is trying to expand its licensing business in China and India. Besides, if management is also successful in its efforts in the gaming industry, net revenue could trend north. If the company really launches a virtual Playboy Mansion in the Metaverse (FB), the stock price could spike up. Let’s note that the metaverse market is expected to grow at a CAGR of close to 39%:

Second, strategically expanding our licensing business in key categories and territories with a focus on China, India and gaming. Source: 10-k

In the metaverse or virtual Playboy Mansion we can reach an audience on a global basis, and we can do that by selling different tiers of membership. I believe consumers today want a lifestyle, they want to go have fun in their lives, especially after two years of being locked down in their homes. Source: Playboy’s Metaverse Vision Can Double The Stock Price

Under this case scenario, I assumed net sales growth of 18%-21% from 2024 to 2026, and a median sales growth of 19%. I also included a median EBITDA margin of 18% with a median operating margin of 9%. Subtracting capital expenditures around $9 million and changes in working capital of $37-$11 million, the free cash flow would stand at $21-$96 million. The median free cash flow margin would be equal to 10.8%, which is close to the figures reported in the past.

Hohaf Investments

With a weighted average cost of capital of 5.77% and using the EV/Forward EBITDA of the industry of 8.5x, the terminal value would be close to $992 million. The discounted free cash flow would range from $41 million in 2023 to $81 million in 2026.

Hohaf Investments

With cash of $67 million and debt around $229 million, I obtained an equity valuation of $1 billion, and an implied valuation of $22 per share.

Hohaf Investments

If PLBY Fails To Integrate The Recent Acquisitions, I Believe That The Fair Price Could Decline To $6.5 Per Share

While PLBY’s brand is old, management is making some innovations, which may be risky. According to the most recent annual report, PLBY engaged a new agency to act as licensing agent. If the agent is not successful, the company may lose licensing opportunities, which would lower PLBY’s future net sales. I expect a decline in the company’s fair price. The stock price could decline:

The failure of our global agent to find or maintain revenue-enhancing licensing opportunities for the business could have an adverse impact on the revenue and cash flows of our consumer business. Source: 10-k

The company also reports a certain concentration of clients. There is a license agreement that comprises close to 32% of total revenue. If management loses one of these clients, revenue growth could diminish significantly. If the free cash flow expectations also decline, and journalists notice, the market capitalization would decline:

Our licensing revenues are concentrated with a limited number of licensees and retail partners. For instance, during the years ended December 31, 2021 and 2020, the five largest license agreements comprised 20% and 32% of consolidated revenues, respectively, and the largest licensee contributed 9% and 15% of consolidated revenues, respectively, during those years. Source: 10-k

Finally, I would be concerned if PLBY does not reach the synergies expected in the most recent transactions. Keep in mind that goodwill represents more than 25% of the total amount of sales. In my view, if accountants report a goodwill impairment, the book value per share will likely decline.

Under this case scenario, net sales would be lower than expected. I assumed sales growth close to 15%-10% from 2024 to 2026. I also assumed an EBITDA ranging from 16.5% to 10% and a median EBITDA margin close to 15%. If we also assume a median operating margin close to 9.5%, capex around $7.5 million, and conservative changes in working capital, 2026 free cash flow would stand at $23 million.

Hohaf Investments

Assuming a weighted average cost of capital of 7.5%-6.5%, the discounted free cash flow would stand at close to $40 million in 2023, and almost $20 million in 2023. Finally, with an exit multiple of 7.5x, the exit multiple would be almost $365 million.

Hohaf Investments

Finally, assuming a share count close to 45 million, the implied market capitalization would be $292 million, and the fair price would be $6.5.

Hohaf Investments

Healthy Balance Sheet

With an asset/liability ratio close to 2x, $32 million in cash, and inventories worth $38 million, PLBY appears well-prepared to finance the company’s international expansion.

10-Q For the quarterly period ended March 31, 2022

The company’s long-term debt is equal to $225 million, which is about 2x forward 2026 EBITDA. In my opinion, the total amount of debt is not small, but future free cash flow will likely pay the total amount of leverage.

10-Q For the quarterly period ended March 31, 2022

Conclusion

PLBY owns a powerful brand, Playboy. Management is trying to obtain revenue from licensing the name in new regions like China and India. Besides, many people are wondering whether the company’s efforts in the Metaverse could make the stock price spike up. Under a conservative DCF model with assumptions close to that of other analysts, I obtained an implied fair price that is significantly higher than the current market price. Failure of recent M&A efforts and losing large licensing agreements could drive the revenue growth down. With that, the current market valuation appears to be too pessimistic. I believe that the stock is a buy.