Spin Master Corp. (TSX:TOY) fell a whopping 17% from its peak last month as a lot of negative press was released following Christmas Day regarding Hatchimals that wouldn’t hatch. In my previous pieces, I mentioned that the stock was extremely overvalued when it was trading at its peak and could correct to the lower $30 range in the near term. This is indeed what happened; the stock fell to the $32 level, which seems to offer a more reasonable valuation given the growth offered by the company.
I believe Spin Master has an amazing vision. Hatchimals was a fantastic product that was meant for young girls but ended up being a hit among young boys and even young adults. The demand for the toy that resulted was off the charts and caught the management team off guard.
Hatchimals was sold out fast, and people were willing to pay thousands of dollars to third-party resellers in order to get the toy before the holidays. Unfortunately, Spin Master’s manufacturing division couldn’t keep up with the insane demand, and that will be a lesson learned for the toy maker.
To this day, there is still a shortage of the toy, and it could take some time before Hatchimals are put back on shelves. When they are back on shelves, will the hype still be there? Or was Hatchimals just a fad that won’t last another year? If it is just a fad, then we can expect more downside for this year, especially considering the fact that many investors are in the stock because of this one toy.
Spin Master co-CEO Anton Rabie stated that “Hatchimals will be around for years,” and I believe this to be true. If you take a look at some of the blockbuster toys from the past, like Tickle Me Elmo or Cabbage Patch Kids, you’ll see that the toys were very popular for many years after their initial release. I believe this will be no different for Hatchimals. When the holidays come around this year, the company will be ready, and the Hatchimals will hatch.
There is also the possibility that the company could introduce different animals that hatch out of its signature egg. Currently, birds of many different colours hatch out of the egg. But going forward, we could see different animals such as dinosaurs. This could result in a demand that exceeds that of last year’s holiday season and could launch Spin Master stock into the atmosphere.
Spin Master knows how to innovate; it’s just a matter of fixing operations and improving quality control. Once this is done, I believe the stock could be a huge winner over the next decade.
The stock currently trades at a 30.47 price-to-earnings multiple, which is quite expensive, but it’s possible that this multiple will get bumped down by a huge amount thanks to the company’s large earnings-growth potential. If you believe Hatchimals is more than just a fad, I would buy more shares at current levels because the stock may be on its way back up to $40 by the end of the year, even if the next quarter isn’t as impressive as analysts are projecting.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joey Frenette has no position in any stocks mentioned.