Sophon Capital's Thunderbird Entertainment Thesis $TBRD
Summary
Investment Thesis: The podcast discusses Thunderbird Entertainment, a small-cap Canadian company, as an attractive investment due to its low valuation, trading at less than 2x next 12 months' EBIT, and its potential as a picks and shovels play in the content production industry.
Company Overview: Thunderbird is a TV and film content production studio with operations in Vancouver, Toronto, Burbank, and Ottawa, working under three economic models: service work, owned IP development, and partnership work.
Market Position: The company is considered a low-cost producer of elite animated content, benefiting from Canadian tax credits, which makes it competitive in the global market, particularly with partners like Disney.
AI Risk: There is concern about AI's impact on Thunderbird's business model, with private equity interest being deterred by potential AI risks, although the company is seen as having strong process power and reputation in the industry.
Shareholder Dynamics: The company has faced pressure from shareholders for a sale, but a recent strategic review concluded that remaining a standalone public company was in its best interest, despite a failed auction process.
Upcoming Catalysts: An anticipated uplisting to the Toronto Stock Exchange is expected to improve liquidity and potentially lead to a re-rating of the stock, which is currently constrained by its listing on the Toronto Venture Exchange.
Streaming Wars Outlook: The podcast suggests a potential reacceleration of the streaming wars, with Thunderbird positioned as a content production partner for multiple streaming platforms, which could drive future growth.
Transcript
And you're about to listen to the yet another value podcast with your host me, Andrew Walker. I'm over here doing a big stretch. Today's uh today's interview is with Franco from So Fun Capital. We're going to be talking about Thunderbird. You know, listen to the full disclaimer at the end, but Thunderbird is a very small again that carries risk. Listen to the disclaimer. Canadian company that has been very very popular among value and adventure investors for the past four years. You know, the stock has been, let's say, left for dead because it trades very cheaply. And, you know, I think a lot of the answers to the questions is why hasn't this worked? All this sort of stuff is, hey, it trades really cheaply now. Like, it's this is one of the cheapest companies out there. So, really interesting company to discuss. I I think you'll find a lot of interesting tidbits in this interview. So, we'll get there, but first a word from our sponsors. Today's podcast is sponsored by trytra.com. Look, Tritrada is expert interviews on the buy side. It's two it's two bysiders who are talking about stocks that they know and I really really like the product. It is just a fantastic way, you know, I'll look at a company, I hop on, they cover hundreds of companies at this point. I look at a company, I think it's interesting, I hop on and I see two sharp byiders who know the names, sometimes skeptics, sometimes bulls, sometimes bears, debating the key points that are relevant to the company. I read it I read a call in 10 15 minutes and then I know hey is this company interesting or were there risks that are just no goes for me. So I think it's fantastic. If you want to go try it tertrada.com/tbrrd I worked with them. They there's a Thunderbird interview. That's the topic of this podcast. There's an interview on there and you can go kind of see what an expert interview on TRA looks like. I think it's really awesome by side for expert interviews. I think it's fantastic. And by the way, do you want to talk to do you want to talk to me about an expert interview? I'm on there. You want to go talk some cable companies? You want to go talk some beaten down micro caps? Boom. Go find some of the names I'm interested in and you can uh it's not uncommon to hear me on the other end of the interview. So, you're I know if you're a regular podcast interviewer, you're always hearing me in your ear anyway, but it's just another way to you can connect with me. You can connect with people a heck of a lot smarter than me. Try.comTVRD. That's trirrada. T r a t-a.comtvbrard. And I think it's just a fantastic research resource for getting up to speeds on names. I I think you're really going to like it. All right. Hello and welcome to the yet another value podcast. I'm your host Andrew Walker with me today. I'm happy to have on for the first time from Sofon Capital Research, Franco Shanz. Franco, how's it going? >> It's going great. Um it's a huge honor to follow the footsteps of one of my close friends and uh my former boss Nan Sachetti who was on your podcast multiple times. So um just wanted to give a shout out to Nan and Papyrus Capital. Uh I'm really excited today to talk about Thunderbird Entertainment. Just I know you usually do your standard disc. Wait, you got to let me do the whole intro, man. Just stop it in. Hey, Nton's awesome. I'm glad glad you mentioned him. Shout out to N. Uh, just before Franco dives into everything, I just have to give a quick disclaimer to remind everyone, nothing on this podcast is entertainment advice. See the full disclaimer at the end of the podcast, but we're talking about a Mory Liquid Micro Cap Canadian entertainment company. Franco kind of already spilled the beans on what the company is, but just remember that carries extra risk. You can see a full disclaimer. Anyway, Franco, you spilled the beans, but let's just hop into it. What is Thunderbird Entertainment, TBRDF in Canada, and why are they so interesting? >> Uh, yeah, sure. So, Thunderbird Entertainment is a very quirky stock. And I would reiterate once again that this is do your own due diligence. This is a highly illquid stock. It has a market cap um of about 75 million Canadian dollars, which I think today equates to about $50 million US. And yesterday it traded I think $75,000 not shares dollars in volume. So this is a very very tiny stock. Um investors have gotten burned on it. Uh there's a lot of people who are disappointed in in how it's performed over the last few years. But really so um Thunderbird is is interesting. It falls directly into what um our firm is looking for. We're we embarked on a project recently. Initially to give you some context, we looked at the full spectrum of market capitalization. So we looked at things as large as eBay um and things as small as Thunderbird. Um today we are building out a project called Sofon Micro Cap atlas which is our new kind of it's on Substack. It's our new research platform that we're trying to cover uh micro cap companies which we define as companies under $500 million in market cap that are investable businesses. So, they're highquality uh businesses. Uh and hopefully we can get them at a fair uh to great price. Uh when you think about those two buckets, I don't like the the dichotomy between value and GARP. I think it's like um I think everything is value, right? Value is what you get, what you pay for. But really, we're looking for investments that fall into one of two categories. Great businesses that you can get at a fair price and fair businesses that you can get at a great price. So when you think of that matrix or that ven diagram and you look at the intersection, Thunderbird falls kind of squarely in the middle. This is a business that I would say is very good. Uh some might argue that it's a great business. Um but I'll call it a very good really good business that you can get at undeniably what I think is an outstanding price which is less than 2x uh next 12 months. EBIT dot which is um you know when you look at a valuation like that the only stocks that I've really seen right now trading at those valuations are like you know tiny like net nets on the Hong Kong stock exchange uh or businesses that are facing like terminal decline or not audited by the big four and people you know are set like a Greek shipping company where the owners are enriching themselves something like that this is a very well-run man managed company I'd say it has we we can discuss later kind they had an activist a proxy battle and there's a whole history uh over the last five years of the company but this is a company that in my mind has very good corporate governance um >> bring let's just pause so that was great background but let's just pause there I I don't think we've said what Thunderbird is and what it does let's just back up and say what Thunderbird is what it does >> Sure thank you for guiding me I feel like I'm going in different tangents is a very simple business it's a TV and film content production studio. It is headquartered in Vancouver, Canada. It has a presence presence in Toronto and it also has studio facilities in Burbank um which is in Los Angeles and uh Ottawa in Canada. Um this company and I'll provide a history on it if you would like but this company uh works under three economic models. The first economic model is um service work and so this is work in which Thunderbird gets hired by a TV network or streaming platform to do production work. um in exchange for a fee. They don't retain any ownership of the intellectual property. Uh and it's very low risk fee for service work. Thunderbird gets their costs except for labor cash flow throughout the production process. Um the next model is owned IP development. So Thunderbird also makes its own content which it uh pitches to the networks and streamers and uh like a typical Hollywood studio and they retain the value of the IP um and and they can monetize it via licensing deals uh consumer products and other revenue streams just like you know JK Rowling has the rights to IP to Harry Potter and can make money off the sale of pillow shams with like Gryffindor emlazed on them like so it's they do both right and The third economic model is really a hybrid of those two and it's partnership work. And so partnership work um in partnership work, Thunderbird literally handles the entire production for their network or streaming platform souped to us. They uh do everything from the pre-production to the writing to the animation which is uh less common in the it's not the case in the service work. In service work they they handle a big part of the production but they don't handle all of it. partnerships can handle pretty much all of it and they get paid a even larger fee in exchange for that work and on top of that they get some of the backend economics um from the mainly the consumer product sales um and so then there's I appreciate I've watched your podcast so many times that I kind of like know the format I know I'll be entering a line of of fire of questioning but um I there's so many ways we can go with this stock it's interesting at the first time it's a simple business. So, it's not a difficult business for people to understand, but there's a lot of history uh with it. And the one last thing I want to say before we dive in um and I'll leave the floor to you is uh what I described earlier is kind of our framework, our bottoms up framework for looking at stocks. We also are very interested in investing thematically in stocks that have a compelling uh set of top- down themes. And I think uh we have our own view on the state of the streaming wars. I won't pretend to be an expert on the streaming wars or what's going on in that arena, but I do I'm informed about it. You probably know have more informed views than me, but I'm informed enough to have my own kind of contrarian view that the streaming wars are going to reacelerate. And Thunderbird, if that happens, Thunderbird's in a unique position. Uh it's really a pick and shovel. It's a pick and shovel trade because you're not betting on any one of the streaming platforms specifically. They have 15 partners currently. everything from Nickelodeon to Netflix to Max to Disney that they all work with. So, they work with all the players. Uh, and they have 24 productions with those 15 players. So, it's really you're getting you're betting just you have a pure play bet on content production going forward. That's a much cleaner play than betting on the stock of Paramount to give you an example. >> Well, stock of Paramount, there's there's issues there, too. But, let me try to to back up and make my bones as a podcast. So look, Thunderbird has been a despite the small cap size and eli liquidity, it has been a very popular play among smaller value in that event people for years. And you mentioned the uh you mentioned the proxy fight. People can go look at the history there. You know, I think that's subtle business, but we can talk about any of that. But it's been a popular play for a lot of the reasons you laid up, right? People say, >> "Yeah, >> uh people look at this and say, hey, it's really cheap. uh EV to IBIDA is low single digits to mid single digits depending on the the day and the time you buy it right but >> very low single digits very low >> it's it's very cheap people have mentioned the picks and shovel play like I've been hearing about the picks and shovel pay for a while on Thunderbird so I guess there was I I think TRDA one of the ways I prepped I I if I had to guess I would believe you were one of the two analysts on the TRA call but don't confirm or deny because Ch is anonymous but you know I read the TRA call and there was uh you know the chronic calls have all sorts of stuff bulls, bears, skeptics, people learning, you know, it was clearly a bull and a skeptic and the skeptic kept saying, "Hey, you know, he was kind of expressing what I was going to express on podcast." He was like, "Look, I was there. I was bullish. I was bullish Thunderbird two years ago at four and now we're two years later at $150." And I guess my question to you just would be, look, a lot of what you laid out, the partnerships, the picks and shovel streaming play, all this sort of stuff. I have thoughts on all of it, but if I just took that away and just said, "Hey, this has been the case for four years." Like, why hasn't it worked? What what's gone on that for four years you've heard Pix and Shovel play cheap stock and it's just it's gotten cheaper. It hasn't grown that much. Why hasn't this worked already? >> Okay. So, that's I think that's where the crux of the conversation lies and where it can probably add the most incremental value. You're right. This has been circling around value investor club some zero. um uh it's not a new idea and I would tell our leaders to our our listeners to refer to th those sources those publicly available sources to get up to speed on the business which hasn't really changed. Um Thunderbird has been going through a period of extreme transition and maybe I can give a little history on the company. I think that that's really going to be helpful to understand how it's evolved and what the different actors at play. It's almost like kind of a Shakespearean drama uh like what's going on there over the last five years. So Thunderbird actually was founded uh over two decades ago in 2003 by the former president and CEO Tim Gamble. Uh they initially had the goal uh which I think is interesting because it speaks to what the CEO's aspirations are. They initially had this goal of investing and um exploiting intellectual property and helping build major global brands. So from the very beginning they were they had an IP driven strategy. Um over the years the business uh started moving towards more production uh the actual production work and then in 2011 and buying IP 2011 they had a big um pivotal moment when Frank Gustra was one of the main players that I'll discuss uh regarding why things have changed with Thunderbird. Um, Franca is a is a former I believe mining uh entrepreneur from Canada who founded Lionsgate Studios. Um, and he basically provided an investment. Today he's like a 10% his foundation is a 10% shareholder in the company and he provided an investment that uh was used uh to acquire the IP the rights to the Bladeunner franchise. And uh that was a big moment for them because they're they're starting to like acquire actual IP. And then uh the business further transformed itself through a series of acquisitions in 2014. They bought Great Pacific Media. GPM is the division today of Thunderbird that makes what's called factual content. So live action content um that's unscripted like reality TV and documentaries some of which have been it's lowcost high margin productions that they can do and they're they're renewed in many cases. And an example would be Highway Through Hell, which is one of the longest running reality TV series of all time. And then in 2016, they bought what really has become the crown jewel flagship piece of the business, which is their animation studio, Atomic Cartoons. Uh, and I want to talk I can I think I have a lot more to offer regarding that division that isn't in the prior writeups that you'll find on the internet on the company. But um 2018 they get um almost like a spa transaction. They merge they do a reverse merger with Golden Secret Ventures which is a defunct mining company um that was a public shell company trading on the Toronto venture exchange. This is also important point to make that I will come back to regarding why things are different today. Uh the Toronto venture exchange I don't know I have never owned another stock in the Toronto venture exchange but looking at the Toronto V exchange um the vast you have I think it was I'm forgetting there's an Australian investor who I absolutely love. He's he's pretty high-profile and he's on Twitter and he's a hedge fun manager and he specializes in shorting companies and he says that uh Vancouver Canada is like the hotbed of financial fraud globally. Uh the Toronto venture exchange >> Boca Raton might like a word with that but >> yeah but when it comes to publicly traded when it comes to public it's funny you say that because I'm right now just outside Miami. This is where I now live. So there's South Florida is very sketchy when it comes to doing business. Uh but uh back to the point, uh Vancouver is a hot bed um for for financial uh crime um and uh fraud in the stock market and in public equities. And um a lot 50% of the companies on that on the Toronto Venture Exchange are mining companies. And there's uh I' I'd vent I'd say there's a sizable percentage of those that are probably um in some way, shape or form fraudulent companies. I'm not exaggerating when I say that it's not it's really not a high profile. >> Let's just switch off the So I I think I know you're going we can come back to the ventures later, but I I just want to focus on on the business for a second, right? So the big the big driver here is atomic their cartoon division. Yeah. >> And when I hear Bulls talk about it, I I think the two things I've heard and people can go read their, as you said, there are countless numbers. >> The Pix and Shovel play, right? Hey, these guys partner right now their big partnership is on Spideiness Friends, a a junior a a a kids Spider-Man show on Disney, right? They've done several and I think that's award-winning. They've done several. I guess let me start here. >> Yeah. >> I know a lot of people like to point to it. Pix and shovel play the more streaming. And I guess there's lots of ways we could break that out, but I would just ask like why does Disney decide to work with them, right? Because Disney has a lot Disney has a lot of in-house animators. >> And when you say, "Hey, Disney's working with them." I say, "Hey, that's cool." But I can't imagine that Disney with all their in-house animators and stuff is outsourcing to these guys for any type of material profit, right? Like I I think on their I was kind of joking. Thunderbird on their last call said content is king and then they said cash is king. So I was like which is the king? But they said content is king and to some >> it's not mutually exclusive. I'll just say I just want to say something. I've read that this in the Q3 call. Uh when they say that I know the paragraph it's not mutually exclusive. What they're saying is that they they I can talk at length so I want to keep it short but they want to really invest in the business. They don't want to make returns just through financial engineering. I think that's clear and that's part of the reason like if they were willing to do that. Yeah, they would be and I'll answer your prior question too. If they were willing to do Yeah. >> Let me just just on that point like we can talk about the king in a second but content is king and I kind of agree with them. It's content and distribution but they in their part in their atomic division when they're working they're not either. And to me that suggests like they're not going to be able to generate economic returns on that. So, I just asked like why does Disney choose to work with them and why do they why should they make any type of profit in that deal? >> I just want to go back to something you just said because I want to make sure I'm understanding it exactly correct. You're saying that they're doing neither. They're not generating cash. Um you you said something just now that I want to make sure I'm capturing correctly. Uh that they're doing neither. >> So, I'm saying if I think like in media content and distribution are king, right? So all of the >> all of the returns on any deal are going to flow to the person who has either the elite IP like a Disney, right? They're going to get all the returns for something or who has elite distribution. I don't think Netflix has great IP, but they have by far the best distribution. So they can get returns. And when Thunderbird is serving just as the producer as they would on a Spidey and Friends or anything, like when I look at that, that is to me I look at that and say it's not a Pix and Shovel play. that is Disney is going out and saying, "Hey, we could make this in-house for $5 million. If someone else wants to fill up their studio, fill up their work by making this for $4.5 million, go at it." But like to me, I don't think they can really make a profit on doing that. >> Uh, you think you think Disney will make a profit if it outsources the production? I think Disney will only outsource to Thunderbird if Thunderbird will make it for lower than Disney's in-house cost. So Thunderbird is running a cost of capital gain. >> And not that they're not going to make a return, they're just going to make a sub a sub or at cost of capital return. I think that's just like a commodity business and I I don't see how it's that valuable. >> Okay. So I there's a lot of points that I want to talk about there and I apologize also. I I'm not this scattering but it's genuinely there's so many avenues you can go talking about Thunderbird and you can get lost in the weed. So thank you for redirecting me. Um regarding your point about Disney and uh outsourcing. So as you know the streaming wars in the beginning it in 2020 2021 it was all about growth at any cost right? Wall Street was rewarding a set of metrics that weren't really profitability or cash flow driven. uh it was really about subscriber growth um and topline growth. Uh and that obviously changed in 2022 2023 um when uh you know the cash burn and and the the losses were being starting to be very evident and the studios needed to re in content costs and there was a pull back in spend. Uh one thing I'll note uh which is uh slightly off topic but worth noting here is that actually in 2023 Thunderbird unlike most other players in this industry grew uh revenue which speaks to I think their their ability to weather downturns in the ecosystem that they're in. But uh we're now in a era where profitability is the most important right like uh there's there needs to be you know I'd say high single digit to low double digit revenue growth but you want to have profitable growth. You don't want to just uh have like this explosive growth and and worry about profits later. It is, I think, a intelligent cost um cutting measure for Disney and it simplifies Disney's model if they actually the in-house animation team and outsource it to a player like Thunderbird. And Thunderbird is the leader in among the the types of companies that do what they do. And that's exactly what Disney did when they acquired um uh Marvel Comics. They um shut down their in-house animation team in Burbank and outsourced the work to Thunderbird. And the reason they did that is because Thunderbird is the lowest cost producer for elite animated content uh in the world. Uh I'd say that's actually one of the main risks I I've identified is that um for instance if if uh Malaysia or even India um or China though I doubt they it would Disney is going to outsource their animation production to China. But if there's some other market or country that opens as a lowcost producer due to the low labor costs of content uh production, then Thunderbird's position could be um jeopardized. But let me just finish the last thing is like Thunderbird benefits from a series of um tax credits, refundable tax credits and incentive programs um in Canada that are both you can stack on top of each other. So they get um 25% rebate on labor costs through the Canada media fund. They get um a rebate on uh or refundable tax credits from the federal government and they also get refundable tax credits from the province of British Columbia where Vancouver is based. And so that's actually why Vancouver has become this hot bed and kind of for animators is because of the environment. When you stack those credits up, you can rebate up to 75% of your labor costs on your production. So that gives Thunderbird the ability to be a lowcost producer and also bid aggressively on projects where um other players economically can't uh match um match them on the bid. Um so I I'll be quiet now, but that's kind of what I'm what I'm hinting at is really they're they're a lowcost producer. They're also in the same time zone as um California. they can um they culturally that Canada is very similar to the US and um it's easier it's I think it's you looked at companies in the 1990s in the US like uh technology large technology companies they outsourced they started outsourcing everything to India like IT companies and I worked at Goldman Sachs right and we had uh analyst um in I was in the TMT group in San Francisco and we had an analyst who uh worked out of uh Bangalore who who did all the modeling for stuff. Um, and the reason why Goldman Sachs had that analyst instead of having it in house was because of the clear fact that he the cost advantage of Indian labor. So that's something that I really think it's worth harping upon is that this is and it's a big competitive advantage of Thunderbirds and I probably should have mentioned all of this at the beginning. This is one of their biggest competitive advantages and it's literally one of the ones that that competitors cannot um cannot really replicate, right? Because they're not based geographically where Thunderbird is. >> Well, so let's go back to the Disney example. >> Yeah, >> Disney uses Thunderbirds for Spidey and Friends, right? And Disney does what if the Marvel television studios and I believe that's made in-house by Marvel uh what is it? Marvel animated studios or whatever it is, right? So why when why does Marvel go with Thunderbird for Spidey and not for what if and why does Disney go with in-house for what if and not outsourcing Thunderbird and I guess I would ask that in one other form >> like the the Canadian tax credits I hear the Canadian tax credits mentioned all the time and they're nice but you know the the Georgia has tax credits and everybody starts shooting in Georgia and ultimately like tax credits to me it's nice but it's a way lowering the cost of capital, but everyone can get them. So, I I guess my two questions is like or we could wrap it into one, right? Why doesn't Disney choose for Spidey and Friends? Why don't they choose, hey, let's just hire five Vancouverbased Disney employees and have them produce Spidey and Friends? And on the other side, for Mar for what if, why don't they say, "Hey, why aren't we producing this in-house? Why don't we outsource it to Thunderbird? Let them do it like like we did for Spidey." like what's driving that? >> That's a really good question. Um and and to be honest, like I did a lot of channel checks. Um but the channel checks I did didn't provide me too much insight on that question. And it's really what you're what you're asking is why why does Disney like why would Disney just build its own studio in Vancouver for instance? Like why do why do they have to even rely on Thunder Vancouver animators? Um, and the truth of the matter is I I mean it comes to a question of like why do firms in general outsource I to your point with the Georgia tax credits there's also tax credits in Florida. I don't think they come nearly close to the track space you get in British Columbia. I also think look this is a company I lived I lived part of the year in Los Angeles and I did uh I have a good network of people in the media entertainment space and I did probably just shy of 30 interviews with everyone from talent agents to people at the streaming platforms ex employees of the streaming platforms to uh creators like writers and animators producers uh and the feedback we got is that Thunderbird and I think this is it might not be a perfect way to answer your question but I think it's the best way I can answer is that Thunderbird's reputation in this industry uh regarding their execution and really their corporate brand is um really like has it's like almost like the type of brand that Goldman Sachs would have. I would call them like the Goldman Sachs of um animation since their main it's 90% of their business the um service side. I'd say that they're almost like a professional services firm for creative work. Um because they bid on projects. It's kind of how they function, right? It's it's similar to like a McKenzie for animation. Uh I think they have executed so well like the feedback is that it was completely consistent and resounding that they have this incredible track record um of being highly reliable of being able to um have extensive capabilities that enable them to work with the most demanding partners like a Disney. Disney, by the way, their their specifications on their content and the characters and how animation the animation looks is like the most demanding in the industry and that pretty much no one or very few people come anywhere close to that. Um, and I think they these companies have had such a huge hugely successful uh experience working with Thunderbird. Um, and Thunderbird has proven time and time again that they are um a good partner to work with. And that's not just ev that's evidenced by the actual fact that it's not just Spidey and Friends, but it's also Iron Man. It's all the they've done work on 101 Dalmatians, all the Disney franchise that they've done work on, they continue providing them with work. And it's also evidenced by the uh hit rate that they have on the IP development side in terms of the number of productions that they um successfully pitch to their network to their clients on the service side. Uh that hit rate is above 80%. So I I would say I'm trying to put myself I'm by no means uh an industry participant in in entertainment and I can't really answer your question as thoroughly and completely as I would like but I think it's probably a case of like why reinvent the wheel mixed with the cost advantage. Um >> yeah let me quickly ask on the hit rate. I think I heard in the TRA call as well both sides mentioned the hit rate. I was just wondering so over 80% success rate for pitches and anybody who's done you mentioned Goldman Sachs is similar or consulting knows that uh that that is a very high rate but what what is the standard hit rate in a when you're pitching production and design for cartoons? What is a hit rate look like? >> Uh that's that's a good question. I've uh I imagine it's like incredibly low like I would say like singledigit percentage because if it's really people who are pitching and this is not production and service work this is I think you're thinking of like when you mentioned Goldman Sachs of the bidding side like when they bid on a project we're talking right now about the owned IP development so uh not like kind of this RFP rate which is for the service side the owned IP development the the projects that Thunderbird comes to the streaming partners with and says, "Hey, we just optioned this piece of IP. We want to develop this piece of content. Um, and we want to pre-ell you the show." Their hit rate on that the CEO has indicated is higher than 80%. >> Okay. Uh, let me go to AI. So, you know, and this is well, it's concerning on the IP side too, but you know, I could imagine a lot of ways AI helps them, right? You could imagine, hey, we used to need to have 10 designers on this project. Now, we only need three because AI does so much work. So, our margins go up. we can handle much more work. All this sort of stuff. I could imagine, hey, you know, we're IP is where the money really is. AI helps us speed up IP. All this sort of stuff. I can imagine it. On the other hand, I could imagine you say, hey, uh, to go back to Disney, I remember they did, what was it, like Disney Secret Wars or something. There was a big controversy where the title cards were all generated by AI and people, this was like right when AI was really starting to roll out and people were up in arms. But uh I you know I could imagine you said hey AI is getting so good. You know you look at the stuff Elon Musk is tweeting in these videos and stuff. I could imagine say hey there's just not even a need for a design and production studio anymore. Like the IP owners can all work with AI to create exactly what they want. So I I would pause there. I I propose two ginormous chasms, right? AI is a huge benefit for them and AI is death for them. And uh how does AI fit into kind of the Thunderbird story? Okay. So, I want to start off by and this is where I think I can provide the most incremental value to the listeners who have been following this saga for uh you know five years now since it started getting pitched. Um and so basically um you know there I've heard through the grape vines by talking through um talking to different major shareholders uh of the company um that private equity has been looking at this. They've been doing outreach to private equity firms and they've gotten close to a cash offer for the company, but private equity has stepped away again and again due to the AI risk. And that's really something that you won't find in that's a recent development, so it's not in those writeups that you find on the internet from uh a few years ago. And I think it explains why this stock is so cheap. And I I will get to the AI point, but you basically have 50% of the float held among five to six investment firms that have gotten burnt on the stock and they want they probably want out. Some of them I think are sellers. You know, I won't name the ones that are and the ones that aren't in my opinion, but I'm suspect that there's quite a few of those six, five or six that are sellers of the stock and they're they're tired of kind of the messaging and communication of the company over the years and uh are a little spooked by the fact that they weren't able to get private equity interest in the company up to now. um because obviously that is uh that will spook you like you know when an asset cannot say sell and there's a failed auction process it's understandable that um the valuation will compress and and funds will want to get out of the stock that is the first part so funds are are bearish not bearish but uh thinking about the AI risk and not executing on the transaction because of it um regarding AI what you've discussed and I'm uh I studed Basically, my major in college was basically philosophy. So, I find and my sisters was as well and we are obsessed with AI and I find this is this is probably a discussion that we could have over like a 4-hour podcast if you want to like go into the philosophical implications of what you're talking about. I will just say that I personally uh and I'll provide um a little bit of my knowledge on the space and another stock which is Adobe which has been uh rattled by those same fears. I personally think that the arts is really the last frontier that will be uh that Jan AI will be used will be leveraged to help produce. I think that um there will be I personally think that there will be a major backlash that that AI is going to um uh eliminate a ton of jobs like for instance my job as a consultant at Bay & Company. I will say on the record I think Chat GBT could do a much better job than me. Uh, and I think that there's going to be a lot of jobs that are eliminated. I don't think the job of an animator is going to be one of them. And I think there's it's partly because a client like Disney, which has an incredible brand, and it's associated with the best of the United States and creativity and the arts, they don't want it to be kind of uh automated through Genai. But there's also a legal component, and this is where it gets um, and I'm not an expert on this, but this is where I get more conviction in my thesis. um when you use chat GPT or you use and there's the recent New York New York Times lawsuit that play that is um that connects to this topic but when you use these AI to produce content to generate content um you're using a model a large language model that trained on uh a ton of third-party content that is usually copyrighted and you don't have the copyright. So your um ability to uh ensure that content is truly original is um lacking. And I think this is an area and I think you're going to see um that alone which is like kind of like the depth of my what is a very surface level um uh understanding of the legal legal implications of AI. That alone is uh caused enough for me to like not have this this bearish outlook on the stock due to AI risk. Um, that said, uh, you know, I talked I talked about Adobe and everyone was saying like no one's gonna use Photoshop anymore because, uh, the, you know, Grock, you can go on Grock and you can I I put a photo of my dad on Grock as a joke. And I was like, make my dad appear like a Roman emperor and it did it completely made my dad put a photo of my dad dressed in like a robe with like in a in a coliseum which was hilarious. like but you can't uh that's not the risk like first off if you know anything about Adobe which I think most of Wall Street doesn't know uh the workflows of like a graphic designer or a a product designer Adobe is definitely going to stay in the future uh people for very intricate work which I think is true of animation too in Thunderbird's case you simply can't get at this point in time the the the production value and the value the content and the quality that you you get from doing it the traditional way that has existed over the last few decades. Um but also in Adobee's case uh I saw someone actually pitch it to me as a long because Adobe has been embedding software in its product suite that enables you to look at uh AI generated content and see if it violates copyright. So, it's interesting. The market was bearish on Adobe, but actually Adobe could very well be a uh play on AI. That's just something I wanted to say. I think that um uh I don't want to get too in the weeds or or off topic, but for me, I I think the main thing is the copyright uh issue, which I mentioned, but also like I >> I just to I definitely hear you on the copyright. I mean, I have been wondering recently, I think last week, Warner Brothers sued Midsummer or whatever for, hey, everybody goes in and says, "Make me a 5-second video of Batman doing the Macarena or something." That's IP infringement, right? Like, I I think there are real IP real outstanding IP risks that are really interesting. And I do wonder if five years from now people are pitching in Warner Brothers as a uh you know, hey, they've got a $5 billion value claim against OpenAI or whatever for all this IP infringement they've done. >> I think that's interesting, but I don't think that changes. You've started to hit it on the with the Adobe point, but I still don't think that changes like the AI risk here, right? Just because AI might have some legacy liabilities for uh legacy recent liabilities for IP infringement doesn't change hey what happens if I think there would be two scenarios right a show that a cartoon that used to take 10 cartoonists what happens if you can do it with three cartoonists is that good or bad for three cartoons because you're using AI to supplement them is that good or bad for Thunderbird or is there a world where six years from now a show is you one cartoonist could make 20 shows because you just put the plot for 20 shows into AI. It produces them and then one cartoonist goes and like workshops the the kind of hits or misses that they need to make sure their brand centered which would be if you're the best cartoonist in the world like you could imagine 5,000 year 500 years ago there was the best singer in every city right and they probably made a normal living. Today there's the best singer in the world. You know, it's Taylor Swift and she makes a billion dollars, but there's no room for the best singer in a city. Like, you could imagine right now there's 5,000 animators. Maybe there's only three 10 years from now. And the three that are in demand make a million dollars per year, but there's no room for anyone else. So, I threw a lot out there like how do you think of the AI risk for Thunderbird when I laid it out like that? >> So, basically, you're what you're describing is a situation which I think is going to happen. It's happening virtually every other industry in which AI causes um workers, employees to uplevel, right? To to do more with with le have more output with less employees. Um and I would venture I mean maybe I'm missing something more profound here, but I would say that that is probably going to be a a major plus for the company. Like I think that maybe the you know I the biggest risk I imagine would be Disney realizes that they can just use AI and it's like the cost differential between relying on Thunderbird once you have AI being fully used for the animation process is not enough to to warrant them outsourcing the production. But um I mean it's I think like it's it's I I won't even pretend to know with with certainty how this is all going to play out. And I think no one could say even someone who's an expert in AI um and also an expert in um this industry could really predict what's going to happen. But my my main takeaway is that I think um less like that is probably going to be a good thing for all the players. Um and when we talk about that risk that that you know Disney realizes that they the cost differential isn't enough to to warrant outsourcing to Thunderbird, I think it's not just a cost thing. Um to your prior question also I don't think it's only it's just a cost thing. I think it's also just simplifying the operation. So if Disney can focus on less the creation side and uh more the distribution and the financing and the marketing and the operation side um that just simplifies their structure which leads to better profit. >> Let me ask one you addressed it a little bit but I I mean >> look I I I'm not going to claim to know all the shareholders here go look at the major shareholders but you can Google this. shareholders have wanted this thing sold for years, right? There were multiple proxy fights. Uh I I know several smaller but vocal shareholders who were publishing letters to the board privately, publicly, all this sort of stuff. >> People want the for years the thesis has been hey picks and shovel play in demand sold and I think the management team resisted it and then they ran a process and in late 2024 they called the process off right and as you said part of the reason they called the process off was AI risk. people that know handicap. But, you know, I kind of go back and say, "Hey, you keep hearing the story where this is in demand, growing, great brand. Why with this many shareholders who want it sold, why hasn't this been sold?" Like, you know, like I I think all my all my many many losses have been I buy an asset and I think it should be sold. And there is a reason people say, "Hey, great assets get sold quickly. Bad assets don't get sold." this has been a a slowmoving sale for three years and there's no sale. like why why are you why are bulls why are me looking at this saying hey this is why is the market like it's hammering us hey it's not as good as you think why are we right and the market's wrong there >> so I think it's a it's a good question I think this is to start off prefacing this this is a very assetike business right so um there isn't the way it works is that they are basically project managers for productions so they will hire contract workers even most of the workers on these productions are contract contractors who they hire just on a project basis which is a huge plus of the company because they don't have to have FTEES who are um you know idle and are getting paid when they're not productive. Uh, I think that that like when you're buying something like Disney, like let's say Disney will obviously never be the target of a leverage buyout, but when you're buying something like Disney, you're getting tremendous asset value, right? Disney is not just a a light asset like project manager of projects. They have the IP, right? They have this they have like a hundred years of incredibly high quality IP that I think you judge the quality of IP based on the on how many high margin uh consumer product sales it makes and Disney generates a ton of um billions of dollars from consumer product sales for kids. Uh Thunderbird is lacking that. And so I can understand that maybe this is like something like a wild brain which has the actual asset value from the IP is more attractive to a buyer than Thunderbird which doesn't seem to own like an like an asset. Do you do you understand what I'm kind of trying to say here? Basically that there's there isn't like like concrete asset value in the balance sheet that that would interest like a P buyer. It's a very assetwike kind of business without >> I mean I think you're you're hitting on the the skepticism I I expressed initially, right? Like you don't have real assets. You're you're putting together contracted workers to put these shows together. Uh that seems like a very low multiple difficult business to me. >> Yeah. I mean I think that you don't want to cast it under generalization, right? Because I will speak back again to the channel checks that I did. um they they it is they've done I think one of one of the things I love sorry to take a step back is um this this framework uh produced by a guy called Hamilton Helmer called the seven powers. I don't know if you've heard of it, but it's like the seven things that rely that provide competitive advantage. And one of them is process power. And process power is how efficiently and skilled the company is in executing its production process uh or its manufacturing process. And I think Thunderbird has nailed it from my discussions has nailed this to a tea. They know how to execute. And again, to our point, why doesn't Disney do it in-house? I'd say another reason Disney doesn't do it in house is because they don't think they can be as efficient as Thunderbird. Uh I think Thunderbird is, you know, you look at also a professional services firm. They don't really have much asset value. They're essentially project managers. Maybe they're their employees are not contractors, but um they they they don't have a lot of asset value in the business on the balance sheet. So I think the thing you're getting here is again an incredible brand. You're getting uh uh relationships with the streamers. I think people are like, "Well, I don't know. I Disney signs on for one project. I don't know if they're going to renew it or they're going to give me more projects." I think you can expect that that production service revenue, although it's not contractually recurring, is in all shape or form recurring. And you get um a great reputation and their expertise in process power in making these animated productions. And that's like really what you're getting. And I think that this company there's going to come a point and you're you're asking me why now. Uh there's a couple reasons why now. There this can't go that much lower, right? I would say that uh a good valuation is like I've told myself that before. >> Yeah. But I don't think like there's obviously three ways to make money on a stock, right? The fundamentals improve, there's a rerating or the cap the capital sector deleverages. They have a net cash balance on the balance sheet. they uh have uh been growing their fundamentals, their their cash flow and their revenue uh pretty consistently. They um and they're mindful about their growth and they've had a tremendous derating from 2021 when they were >> Let's talk cash. I I want to wrap up with one question. You mentioned you kind of alluded earlier and I'm really interested in this. Look, I was joking because they said on their call, they said continent is king is cash is king. And there can only be one king unless we're going to war and we have multiple empires and everything, but there can generally only be one king. You know, you've got this stock just shelled out. Multi-year shelled out. Shareholders, again, I'd go back to the chronic call. I'd go back to the shareholder letters, everything. Shareholders are frustrated. A lot of people throw in the towel. you've got tons of cash on the balance sheet and as you said a generally asset light company and the company comes on the Q3 call and says hey I do remember one shareholder suggested they start making animations for Donald Trump which I thought was kind of funny but you've got shareholders come on the call and say hey why don't you buy back stock right you've got all this cash asset light business and they say cash is king we can't buy back stock we want to have a strong balance sheet we want to maintain and I get that but asset light shell out stock the low valuation like It kind of seems to me the one of the knocks on Thunderbird for the past 15 years is hey these guys want to go like all media people these guys want to go empire built they want to go buy stuff and when you've got a stock this low and they refuse to use the share repurchase it just kind of looks like to me like hey these guys want to buy stuff they they don't really want to they >> yeah so I I just want to end with that discussion >> this is yeah let's end with that discussion I think that is like where the Shakespeare Shakespearean drama unfolds you have on one side Vos Capital who's is an investor I really respect. And then you have uh on the other side Marne Weisshoffer who's a former board member and the CFO of a former CFO of Lionsgate. Um and Frank Gustro was the founder and then kind of in the middle you have Jennifer McCarron brokering a peace deal and this was in the proxy battle which took place two years ago but I think outlines speaks to your point. Marty Weissoff and Frank Gustro wanted to build the next Lionsgate. And they were convinced that if you continue what they call batting singles, investing in your own IP, taking the cash flow from the production service work and investing it in your own uh children animated productions that you own the IP to that eventually you're going to strike gold. And they they did it with Lionsgate. They transformed Lionsgate from a small Vancouver studio to a global player uh with that strategy. And then you have Voss Capital which is like I want to do financial engineering. It's a similar situation actually to uh Bill not Bill Aman Dan Lope u maybe five or six years ago he was uh launching an activist fight against Sony and he was talking about how there needs to be less investment into owned IP in Sony films and their and their creative side and uh George Clooney actually wrote a letter saying no they have to continue creating. It's a debate. Um, I think I personally >> Does George Clooney own a lot of Sony stock? >> Say what? >> Does George Clooney own a lot of Sony stock? >> Maybe he does. He's definitely an actor in Sony, but I I >> No, but my point is like, yes, for an actor who gets paid and does projects and stuff. the it's very easy to say oh they really need to create like you know I I'm very familiar with these studios and especially postcoid but even before I think the debate was hey yes they are creating but it seems like all the returns from them creating are really going to the actors and the directors I don't know how much of it is actually >> of course I'm sure I'm sure George has way less skin in the game than Dan Lo I'm not trying to imply that they're equals but uh I just wanted to use that to uh illustrate the point that um I'm trying to make which is that you can play and this is true of anything. You can reinvest in the business or you can do financial engineering. That's just a common theme when it comes to corporate governance and it's an interesting debate. I ideally would like to see a mix of the two because I think that they can they option the rights to last kids on earth for like less than $10,000. So I think they can meaningfully invest in IP while buying back more of their stock. This gets to the major point for regarding which I feel like we've been walking talking about all kinds of things on this episode and we didn't even get to this point which is the major catalyst at the end by the end of this year they are uplisting to the TSX uh exchange the Toronto exchange not the Toronto venture exchange which is the major exchange in Canada and there are rules and I think this thing is so cheap not just because people are spooked by a failed auction process but because it's just so illquid like I said at the start of the episode $75,000 of stock were traded yesterday. So really no institutional player can own this anymore. And there are rules in I don't know the exact ones but in the Toronto Toronto exchange there are rules regarding how much stock um you like a minimum amount of stock that you have to buy if you're doing buybacks as a percentage of the float. Whereas in the TSX Venture Exchange there's a limit of 10% of the float that you can buy back uh do share buybacks on. And I think just being on that exchange, having more visibility, having a larger set of mandatory buybacks is going to increase liquidity way more and we would see this thing at least rerate to 3 to 4x, which is, you know, would be a great outcome for anyone coming into the stock right now. Um, but I think yeah, I think that would be a major catalyst. It's something that I I think there's a theme also and I I consider the CEO to be fantastic CE CEO. I think Jennifer McCarron's a great CEO. I think she's very mindful. She doesn't want to just um do the quick thing to like get a rerating. Uh they were looking at doing a NASDAQ uh up listing in 2021 uh 2022. They shoved that idea because they didn't want to they thought it could flop like they thought that the IPO would be unsuccessful in the NASDAQ which I thought was an unfounded fear and also because they had you know 1 to 2 million capital markets fees which was very sizable for a company of their size. Uh I think that they have been very cautious um in and and in kind of gearing towards just investing in the business versus doing very tangible corporate actions that would rerate the stocks. But I think you're starting to see a change. I'm sure I haven't been able to talk to Boss Capital um because uh for various reasons, but uh I'm I know that they're still pressuring them. I know that this um move to do an OP listing was probably prompted by them. And I think you're going to see I think the more time that the management can't execute and strike gold, like strike the next uh pep of the pig, the more the less credibility they have and the more likely they're going to succumb to investor pressures to do the buybacks um to to do actions that will will raise the stock. And that's that's the truth of the matter. I mean, um I think when you when why am I in this? I'm in this because it's trading at 1.6 times uh EBITA, which is outrageous for a business of this quality. Uh >> look, I mean I I I just that's the thing like as I'm asking these questions, discussion like I feel like I should have led every question off with like but it's trading at 1.6 times IBIDA and like they get all the tax credits you talked about and it's asset light. There is amortization in there but you know I don't think it's a stress to say this is four times after taxfree cash flow is kind of multiple. like all the questions I have it should I feel like the answer should just be but it's trading at four times free cash flow right like so that's that's the crux of the that's the it's a tough thing with these really small micrs look I've got a hard top I think so anything else you think we should have hit on or touched on >> no I would just harp on the point that I think the main issue I I don't think uh it's been as publicly uh talked about I think people in the buy side in these circles who increasingly are not buyers of stock due to liquidity constraints know that the they had a failed process. I think the average retail investor is not aware of those dynamics because really the only outside communication was that they um it did a strategic review in 2023 which determined that they it was in their best interest to remain a standalone public company. Uh but I think what you're going to see is that the liquidity which has been a big uh issue for the stock is going to meaningfully improve when they uplist in a few months by a few months to the Toronto exchange. And uh that alone could drive a rerating. And the last thing which is I think I think I didn't talk about this enough and I I want to end with this note. Um but I do think we're reaching a reaceleration of the content wars. I think if you look at the history of the the streaming wars at first it was full intensity the time of peak TV from 2020 to 2022 then you had uh this era in which profitability was paramount then you have what's called the frennemy era which is when they were bundling the bundling economy started happening and you see like HBO Max partnering with Disney to put uh Hulu and Disney Plus and Max under one bundle. Um, I don't people look at that new rise in bundling and they say, "Hey, I don't think I think the streaming wars are over. There's going to be a consistent rain back in content spending." And I really don't think that is the case to be honest. I think that right now four, they've done consumer surveys that show that the average American household has four streaming subscriptions. uh and that the I don't know the percentage but more than 50% of American of those households uh want to rationalize their spending and cut back on their subscriptions. And then you also have data that shows that only one in five um uh streaming subscription services uh among the average household was purchased through an indirect channel which is in other words a bundle like Verizon Plus or or or the previous bundle I mentioned the Disney HBO one. I think I I have this view which I didn't talk a lot about and it's controversial. I'm sure people will disagree with it that there's going to be a real acceleration in content spend because uh content is really what differentiates these platforms for the end consumer. Okay, cool. Uh it's a yeah it's a view. Uh anyway, look, this has been great. Uh Thunderbird Entertainment, Franco from Sofon Capital Research, thanks so much for coming on and uh we'll talk soon. Thank you. >> A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.
Sophon Capital's Thunderbird Entertainment Thesis $TBRD
Summary
Transcript
And you're about to listen to the yet another value podcast with your host me, Andrew Walker. I'm over here doing a big stretch. Today's uh today's interview is with Franco from So Fun Capital. We're going to be talking about Thunderbird. You know, listen to the full disclaimer at the end, but Thunderbird is a very small again that carries risk. Listen to the disclaimer. Canadian company that has been very very popular among value and adventure investors for the past four years. You know, the stock has been, let's say, left for dead because it trades very cheaply. And, you know, I think a lot of the answers to the questions is why hasn't this worked? All this sort of stuff is, hey, it trades really cheaply now. Like, it's this is one of the cheapest companies out there. So, really interesting company to discuss. I I think you'll find a lot of interesting tidbits in this interview. So, we'll get there, but first a word from our sponsors. Today's podcast is sponsored by trytra.com. Look, Tritrada is expert interviews on the buy side. It's two it's two bysiders who are talking about stocks that they know and I really really like the product. It is just a fantastic way, you know, I'll look at a company, I hop on, they cover hundreds of companies at this point. I look at a company, I think it's interesting, I hop on and I see two sharp byiders who know the names, sometimes skeptics, sometimes bulls, sometimes bears, debating the key points that are relevant to the company. I read it I read a call in 10 15 minutes and then I know hey is this company interesting or were there risks that are just no goes for me. So I think it's fantastic. If you want to go try it tertrada.com/tbrrd I worked with them. They there's a Thunderbird interview. That's the topic of this podcast. There's an interview on there and you can go kind of see what an expert interview on TRA looks like. I think it's really awesome by side for expert interviews. I think it's fantastic. And by the way, do you want to talk to do you want to talk to me about an expert interview? I'm on there. You want to go talk some cable companies? You want to go talk some beaten down micro caps? Boom. Go find some of the names I'm interested in and you can uh it's not uncommon to hear me on the other end of the interview. So, you're I know if you're a regular podcast interviewer, you're always hearing me in your ear anyway, but it's just another way to you can connect with me. You can connect with people a heck of a lot smarter than me. Try.comTVRD. That's trirrada. T r a t-a.comtvbrard. And I think it's just a fantastic research resource for getting up to speeds on names. I I think you're really going to like it. All right. Hello and welcome to the yet another value podcast. I'm your host Andrew Walker with me today. I'm happy to have on for the first time from Sofon Capital Research, Franco Shanz. Franco, how's it going? >> It's going great. Um it's a huge honor to follow the footsteps of one of my close friends and uh my former boss Nan Sachetti who was on your podcast multiple times. So um just wanted to give a shout out to Nan and Papyrus Capital. Uh I'm really excited today to talk about Thunderbird Entertainment. Just I know you usually do your standard disc. Wait, you got to let me do the whole intro, man. Just stop it in. Hey, Nton's awesome. I'm glad glad you mentioned him. Shout out to N. Uh, just before Franco dives into everything, I just have to give a quick disclaimer to remind everyone, nothing on this podcast is entertainment advice. See the full disclaimer at the end of the podcast, but we're talking about a Mory Liquid Micro Cap Canadian entertainment company. Franco kind of already spilled the beans on what the company is, but just remember that carries extra risk. You can see a full disclaimer. Anyway, Franco, you spilled the beans, but let's just hop into it. What is Thunderbird Entertainment, TBRDF in Canada, and why are they so interesting? >> Uh, yeah, sure. So, Thunderbird Entertainment is a very quirky stock. And I would reiterate once again that this is do your own due diligence. This is a highly illquid stock. It has a market cap um of about 75 million Canadian dollars, which I think today equates to about $50 million US. And yesterday it traded I think $75,000 not shares dollars in volume. So this is a very very tiny stock. Um investors have gotten burned on it. Uh there's a lot of people who are disappointed in in how it's performed over the last few years. But really so um Thunderbird is is interesting. It falls directly into what um our firm is looking for. We're we embarked on a project recently. Initially to give you some context, we looked at the full spectrum of market capitalization. So we looked at things as large as eBay um and things as small as Thunderbird. Um today we are building out a project called Sofon Micro Cap atlas which is our new kind of it's on Substack. It's our new research platform that we're trying to cover uh micro cap companies which we define as companies under $500 million in market cap that are investable businesses. So, they're highquality uh businesses. Uh and hopefully we can get them at a fair uh to great price. Uh when you think about those two buckets, I don't like the the dichotomy between value and GARP. I think it's like um I think everything is value, right? Value is what you get, what you pay for. But really, we're looking for investments that fall into one of two categories. Great businesses that you can get at a fair price and fair businesses that you can get at a great price. So when you think of that matrix or that ven diagram and you look at the intersection, Thunderbird falls kind of squarely in the middle. This is a business that I would say is very good. Uh some might argue that it's a great business. Um but I'll call it a very good really good business that you can get at undeniably what I think is an outstanding price which is less than 2x uh next 12 months. EBIT dot which is um you know when you look at a valuation like that the only stocks that I've really seen right now trading at those valuations are like you know tiny like net nets on the Hong Kong stock exchange uh or businesses that are facing like terminal decline or not audited by the big four and people you know are set like a Greek shipping company where the owners are enriching themselves something like that this is a very well-run man managed company I'd say it has we we can discuss later kind they had an activist a proxy battle and there's a whole history uh over the last five years of the company but this is a company that in my mind has very good corporate governance um >> bring let's just pause so that was great background but let's just pause there I I don't think we've said what Thunderbird is and what it does let's just back up and say what Thunderbird is what it does >> Sure thank you for guiding me I feel like I'm going in different tangents is a very simple business it's a TV and film content production studio. It is headquartered in Vancouver, Canada. It has a presence presence in Toronto and it also has studio facilities in Burbank um which is in Los Angeles and uh Ottawa in Canada. Um this company and I'll provide a history on it if you would like but this company uh works under three economic models. The first economic model is um service work and so this is work in which Thunderbird gets hired by a TV network or streaming platform to do production work. um in exchange for a fee. They don't retain any ownership of the intellectual property. Uh and it's very low risk fee for service work. Thunderbird gets their costs except for labor cash flow throughout the production process. Um the next model is owned IP development. So Thunderbird also makes its own content which it uh pitches to the networks and streamers and uh like a typical Hollywood studio and they retain the value of the IP um and and they can monetize it via licensing deals uh consumer products and other revenue streams just like you know JK Rowling has the rights to IP to Harry Potter and can make money off the sale of pillow shams with like Gryffindor emlazed on them like so it's they do both right and The third economic model is really a hybrid of those two and it's partnership work. And so partnership work um in partnership work, Thunderbird literally handles the entire production for their network or streaming platform souped to us. They uh do everything from the pre-production to the writing to the animation which is uh less common in the it's not the case in the service work. In service work they they handle a big part of the production but they don't handle all of it. partnerships can handle pretty much all of it and they get paid a even larger fee in exchange for that work and on top of that they get some of the backend economics um from the mainly the consumer product sales um and so then there's I appreciate I've watched your podcast so many times that I kind of like know the format I know I'll be entering a line of of fire of questioning but um I there's so many ways we can go with this stock it's interesting at the first time it's a simple business. So, it's not a difficult business for people to understand, but there's a lot of history uh with it. And the one last thing I want to say before we dive in um and I'll leave the floor to you is uh what I described earlier is kind of our framework, our bottoms up framework for looking at stocks. We also are very interested in investing thematically in stocks that have a compelling uh set of top- down themes. And I think uh we have our own view on the state of the streaming wars. I won't pretend to be an expert on the streaming wars or what's going on in that arena, but I do I'm informed about it. You probably know have more informed views than me, but I'm informed enough to have my own kind of contrarian view that the streaming wars are going to reacelerate. And Thunderbird, if that happens, Thunderbird's in a unique position. Uh it's really a pick and shovel. It's a pick and shovel trade because you're not betting on any one of the streaming platforms specifically. They have 15 partners currently. everything from Nickelodeon to Netflix to Max to Disney that they all work with. So, they work with all the players. Uh, and they have 24 productions with those 15 players. So, it's really you're getting you're betting just you have a pure play bet on content production going forward. That's a much cleaner play than betting on the stock of Paramount to give you an example. >> Well, stock of Paramount, there's there's issues there, too. But, let me try to to back up and make my bones as a podcast. So look, Thunderbird has been a despite the small cap size and eli liquidity, it has been a very popular play among smaller value in that event people for years. And you mentioned the uh you mentioned the proxy fight. People can go look at the history there. You know, I think that's subtle business, but we can talk about any of that. But it's been a popular play for a lot of the reasons you laid up, right? People say, >> "Yeah, >> uh people look at this and say, hey, it's really cheap. uh EV to IBIDA is low single digits to mid single digits depending on the the day and the time you buy it right but >> very low single digits very low >> it's it's very cheap people have mentioned the picks and shovel play like I've been hearing about the picks and shovel pay for a while on Thunderbird so I guess there was I I think TRDA one of the ways I prepped I I if I had to guess I would believe you were one of the two analysts on the TRA call but don't confirm or deny because Ch is anonymous but you know I read the TRA call and there was uh you know the chronic calls have all sorts of stuff bulls, bears, skeptics, people learning, you know, it was clearly a bull and a skeptic and the skeptic kept saying, "Hey, you know, he was kind of expressing what I was going to express on podcast." He was like, "Look, I was there. I was bullish. I was bullish Thunderbird two years ago at four and now we're two years later at $150." And I guess my question to you just would be, look, a lot of what you laid out, the partnerships, the picks and shovel streaming play, all this sort of stuff. I have thoughts on all of it, but if I just took that away and just said, "Hey, this has been the case for four years." Like, why hasn't it worked? What what's gone on that for four years you've heard Pix and Shovel play cheap stock and it's just it's gotten cheaper. It hasn't grown that much. Why hasn't this worked already? >> Okay. So, that's I think that's where the crux of the conversation lies and where it can probably add the most incremental value. You're right. This has been circling around value investor club some zero. um uh it's not a new idea and I would tell our leaders to our our listeners to refer to th those sources those publicly available sources to get up to speed on the business which hasn't really changed. Um Thunderbird has been going through a period of extreme transition and maybe I can give a little history on the company. I think that that's really going to be helpful to understand how it's evolved and what the different actors at play. It's almost like kind of a Shakespearean drama uh like what's going on there over the last five years. So Thunderbird actually was founded uh over two decades ago in 2003 by the former president and CEO Tim Gamble. Uh they initially had the goal uh which I think is interesting because it speaks to what the CEO's aspirations are. They initially had this goal of investing and um exploiting intellectual property and helping build major global brands. So from the very beginning they were they had an IP driven strategy. Um over the years the business uh started moving towards more production uh the actual production work and then in 2011 and buying IP 2011 they had a big um pivotal moment when Frank Gustra was one of the main players that I'll discuss uh regarding why things have changed with Thunderbird. Um, Franca is a is a former I believe mining uh entrepreneur from Canada who founded Lionsgate Studios. Um, and he basically provided an investment. Today he's like a 10% his foundation is a 10% shareholder in the company and he provided an investment that uh was used uh to acquire the IP the rights to the Bladeunner franchise. And uh that was a big moment for them because they're they're starting to like acquire actual IP. And then uh the business further transformed itself through a series of acquisitions in 2014. They bought Great Pacific Media. GPM is the division today of Thunderbird that makes what's called factual content. So live action content um that's unscripted like reality TV and documentaries some of which have been it's lowcost high margin productions that they can do and they're they're renewed in many cases. And an example would be Highway Through Hell, which is one of the longest running reality TV series of all time. And then in 2016, they bought what really has become the crown jewel flagship piece of the business, which is their animation studio, Atomic Cartoons. Uh, and I want to talk I can I think I have a lot more to offer regarding that division that isn't in the prior writeups that you'll find on the internet on the company. But um 2018 they get um almost like a spa transaction. They merge they do a reverse merger with Golden Secret Ventures which is a defunct mining company um that was a public shell company trading on the Toronto venture exchange. This is also important point to make that I will come back to regarding why things are different today. Uh the Toronto venture exchange I don't know I have never owned another stock in the Toronto venture exchange but looking at the Toronto V exchange um the vast you have I think it was I'm forgetting there's an Australian investor who I absolutely love. He's he's pretty high-profile and he's on Twitter and he's a hedge fun manager and he specializes in shorting companies and he says that uh Vancouver Canada is like the hotbed of financial fraud globally. Uh the Toronto venture exchange >> Boca Raton might like a word with that but >> yeah but when it comes to publicly traded when it comes to public it's funny you say that because I'm right now just outside Miami. This is where I now live. So there's South Florida is very sketchy when it comes to doing business. Uh but uh back to the point, uh Vancouver is a hot bed um for for financial uh crime um and uh fraud in the stock market and in public equities. And um a lot 50% of the companies on that on the Toronto Venture Exchange are mining companies. And there's uh I' I'd vent I'd say there's a sizable percentage of those that are probably um in some way, shape or form fraudulent companies. I'm not exaggerating when I say that it's not it's really not a high profile. >> Let's just switch off the So I I think I know you're going we can come back to the ventures later, but I I just want to focus on on the business for a second, right? So the big the big driver here is atomic their cartoon division. Yeah. >> And when I hear Bulls talk about it, I I think the two things I've heard and people can go read their, as you said, there are countless numbers. >> The Pix and Shovel play, right? Hey, these guys partner right now their big partnership is on Spideiness Friends, a a junior a a a kids Spider-Man show on Disney, right? They've done several and I think that's award-winning. They've done several. I guess let me start here. >> Yeah. >> I know a lot of people like to point to it. Pix and shovel play the more streaming. And I guess there's lots of ways we could break that out, but I would just ask like why does Disney decide to work with them, right? Because Disney has a lot Disney has a lot of in-house animators. >> And when you say, "Hey, Disney's working with them." I say, "Hey, that's cool." But I can't imagine that Disney with all their in-house animators and stuff is outsourcing to these guys for any type of material profit, right? Like I I think on their I was kind of joking. Thunderbird on their last call said content is king and then they said cash is king. So I was like which is the king? But they said content is king and to some >> it's not mutually exclusive. I'll just say I just want to say something. I've read that this in the Q3 call. Uh when they say that I know the paragraph it's not mutually exclusive. What they're saying is that they they I can talk at length so I want to keep it short but they want to really invest in the business. They don't want to make returns just through financial engineering. I think that's clear and that's part of the reason like if they were willing to do that. Yeah, they would be and I'll answer your prior question too. If they were willing to do Yeah. >> Let me just just on that point like we can talk about the king in a second but content is king and I kind of agree with them. It's content and distribution but they in their part in their atomic division when they're working they're not either. And to me that suggests like they're not going to be able to generate economic returns on that. So, I just asked like why does Disney choose to work with them and why do they why should they make any type of profit in that deal? >> I just want to go back to something you just said because I want to make sure I'm understanding it exactly correct. You're saying that they're doing neither. They're not generating cash. Um you you said something just now that I want to make sure I'm capturing correctly. Uh that they're doing neither. >> So, I'm saying if I think like in media content and distribution are king, right? So all of the >> all of the returns on any deal are going to flow to the person who has either the elite IP like a Disney, right? They're going to get all the returns for something or who has elite distribution. I don't think Netflix has great IP, but they have by far the best distribution. So they can get returns. And when Thunderbird is serving just as the producer as they would on a Spidey and Friends or anything, like when I look at that, that is to me I look at that and say it's not a Pix and Shovel play. that is Disney is going out and saying, "Hey, we could make this in-house for $5 million. If someone else wants to fill up their studio, fill up their work by making this for $4.5 million, go at it." But like to me, I don't think they can really make a profit on doing that. >> Uh, you think you think Disney will make a profit if it outsources the production? I think Disney will only outsource to Thunderbird if Thunderbird will make it for lower than Disney's in-house cost. So Thunderbird is running a cost of capital gain. >> And not that they're not going to make a return, they're just going to make a sub a sub or at cost of capital return. I think that's just like a commodity business and I I don't see how it's that valuable. >> Okay. So I there's a lot of points that I want to talk about there and I apologize also. I I'm not this scattering but it's genuinely there's so many avenues you can go talking about Thunderbird and you can get lost in the weed. So thank you for redirecting me. Um regarding your point about Disney and uh outsourcing. So as you know the streaming wars in the beginning it in 2020 2021 it was all about growth at any cost right? Wall Street was rewarding a set of metrics that weren't really profitability or cash flow driven. uh it was really about subscriber growth um and topline growth. Uh and that obviously changed in 2022 2023 um when uh you know the cash burn and and the the losses were being starting to be very evident and the studios needed to re in content costs and there was a pull back in spend. Uh one thing I'll note uh which is uh slightly off topic but worth noting here is that actually in 2023 Thunderbird unlike most other players in this industry grew uh revenue which speaks to I think their their ability to weather downturns in the ecosystem that they're in. But uh we're now in a era where profitability is the most important right like uh there's there needs to be you know I'd say high single digit to low double digit revenue growth but you want to have profitable growth. You don't want to just uh have like this explosive growth and and worry about profits later. It is, I think, a intelligent cost um cutting measure for Disney and it simplifies Disney's model if they actually the in-house animation team and outsource it to a player like Thunderbird. And Thunderbird is the leader in among the the types of companies that do what they do. And that's exactly what Disney did when they acquired um uh Marvel Comics. They um shut down their in-house animation team in Burbank and outsourced the work to Thunderbird. And the reason they did that is because Thunderbird is the lowest cost producer for elite animated content uh in the world. Uh I'd say that's actually one of the main risks I I've identified is that um for instance if if uh Malaysia or even India um or China though I doubt they it would Disney is going to outsource their animation production to China. But if there's some other market or country that opens as a lowcost producer due to the low labor costs of content uh production, then Thunderbird's position could be um jeopardized. But let me just finish the last thing is like Thunderbird benefits from a series of um tax credits, refundable tax credits and incentive programs um in Canada that are both you can stack on top of each other. So they get um 25% rebate on labor costs through the Canada media fund. They get um a rebate on uh or refundable tax credits from the federal government and they also get refundable tax credits from the province of British Columbia where Vancouver is based. And so that's actually why Vancouver has become this hot bed and kind of for animators is because of the environment. When you stack those credits up, you can rebate up to 75% of your labor costs on your production. So that gives Thunderbird the ability to be a lowcost producer and also bid aggressively on projects where um other players economically can't uh match um match them on the bid. Um so I I'll be quiet now, but that's kind of what I'm what I'm hinting at is really they're they're a lowcost producer. They're also in the same time zone as um California. they can um they culturally that Canada is very similar to the US and um it's easier it's I think it's you looked at companies in the 1990s in the US like uh technology large technology companies they outsourced they started outsourcing everything to India like IT companies and I worked at Goldman Sachs right and we had uh analyst um in I was in the TMT group in San Francisco and we had an analyst who uh worked out of uh Bangalore who who did all the modeling for stuff. Um, and the reason why Goldman Sachs had that analyst instead of having it in house was because of the clear fact that he the cost advantage of Indian labor. So that's something that I really think it's worth harping upon is that this is and it's a big competitive advantage of Thunderbirds and I probably should have mentioned all of this at the beginning. This is one of their biggest competitive advantages and it's literally one of the ones that that competitors cannot um cannot really replicate, right? Because they're not based geographically where Thunderbird is. >> Well, so let's go back to the Disney example. >> Yeah, >> Disney uses Thunderbirds for Spidey and Friends, right? And Disney does what if the Marvel television studios and I believe that's made in-house by Marvel uh what is it? Marvel animated studios or whatever it is, right? So why when why does Marvel go with Thunderbird for Spidey and not for what if and why does Disney go with in-house for what if and not outsourcing Thunderbird and I guess I would ask that in one other form >> like the the Canadian tax credits I hear the Canadian tax credits mentioned all the time and they're nice but you know the the Georgia has tax credits and everybody starts shooting in Georgia and ultimately like tax credits to me it's nice but it's a way lowering the cost of capital, but everyone can get them. So, I I guess my two questions is like or we could wrap it into one, right? Why doesn't Disney choose for Spidey and Friends? Why don't they choose, hey, let's just hire five Vancouverbased Disney employees and have them produce Spidey and Friends? And on the other side, for Mar for what if, why don't they say, "Hey, why aren't we producing this in-house? Why don't we outsource it to Thunderbird? Let them do it like like we did for Spidey." like what's driving that? >> That's a really good question. Um and and to be honest, like I did a lot of channel checks. Um but the channel checks I did didn't provide me too much insight on that question. And it's really what you're what you're asking is why why does Disney like why would Disney just build its own studio in Vancouver for instance? Like why do why do they have to even rely on Thunder Vancouver animators? Um, and the truth of the matter is I I mean it comes to a question of like why do firms in general outsource I to your point with the Georgia tax credits there's also tax credits in Florida. I don't think they come nearly close to the track space you get in British Columbia. I also think look this is a company I lived I lived part of the year in Los Angeles and I did uh I have a good network of people in the media entertainment space and I did probably just shy of 30 interviews with everyone from talent agents to people at the streaming platforms ex employees of the streaming platforms to uh creators like writers and animators producers uh and the feedback we got is that Thunderbird and I think this is it might not be a perfect way to answer your question but I think it's the best way I can answer is that Thunderbird's reputation in this industry uh regarding their execution and really their corporate brand is um really like has it's like almost like the type of brand that Goldman Sachs would have. I would call them like the Goldman Sachs of um animation since their main it's 90% of their business the um service side. I'd say that they're almost like a professional services firm for creative work. Um because they bid on projects. It's kind of how they function, right? It's it's similar to like a McKenzie for animation. Uh I think they have executed so well like the feedback is that it was completely consistent and resounding that they have this incredible track record um of being highly reliable of being able to um have extensive capabilities that enable them to work with the most demanding partners like a Disney. Disney, by the way, their their specifications on their content and the characters and how animation the animation looks is like the most demanding in the industry and that pretty much no one or very few people come anywhere close to that. Um, and I think they these companies have had such a huge hugely successful uh experience working with Thunderbird. Um, and Thunderbird has proven time and time again that they are um a good partner to work with. And that's not just ev that's evidenced by the actual fact that it's not just Spidey and Friends, but it's also Iron Man. It's all the they've done work on 101 Dalmatians, all the Disney franchise that they've done work on, they continue providing them with work. And it's also evidenced by the uh hit rate that they have on the IP development side in terms of the number of productions that they um successfully pitch to their network to their clients on the service side. Uh that hit rate is above 80%. So I I would say I'm trying to put myself I'm by no means uh an industry participant in in entertainment and I can't really answer your question as thoroughly and completely as I would like but I think it's probably a case of like why reinvent the wheel mixed with the cost advantage. Um >> yeah let me quickly ask on the hit rate. I think I heard in the TRA call as well both sides mentioned the hit rate. I was just wondering so over 80% success rate for pitches and anybody who's done you mentioned Goldman Sachs is similar or consulting knows that uh that that is a very high rate but what what is the standard hit rate in a when you're pitching production and design for cartoons? What is a hit rate look like? >> Uh that's that's a good question. I've uh I imagine it's like incredibly low like I would say like singledigit percentage because if it's really people who are pitching and this is not production and service work this is I think you're thinking of like when you mentioned Goldman Sachs of the bidding side like when they bid on a project we're talking right now about the owned IP development so uh not like kind of this RFP rate which is for the service side the owned IP development the the projects that Thunderbird comes to the streaming partners with and says, "Hey, we just optioned this piece of IP. We want to develop this piece of content. Um, and we want to pre-ell you the show." Their hit rate on that the CEO has indicated is higher than 80%. >> Okay. Uh, let me go to AI. So, you know, and this is well, it's concerning on the IP side too, but you know, I could imagine a lot of ways AI helps them, right? You could imagine, hey, we used to need to have 10 designers on this project. Now, we only need three because AI does so much work. So, our margins go up. we can handle much more work. All this sort of stuff. I could imagine, hey, you know, we're IP is where the money really is. AI helps us speed up IP. All this sort of stuff. I can imagine it. On the other hand, I could imagine you say, hey, uh, to go back to Disney, I remember they did, what was it, like Disney Secret Wars or something. There was a big controversy where the title cards were all generated by AI and people, this was like right when AI was really starting to roll out and people were up in arms. But uh I you know I could imagine you said hey AI is getting so good. You know you look at the stuff Elon Musk is tweeting in these videos and stuff. I could imagine say hey there's just not even a need for a design and production studio anymore. Like the IP owners can all work with AI to create exactly what they want. So I I would pause there. I I propose two ginormous chasms, right? AI is a huge benefit for them and AI is death for them. And uh how does AI fit into kind of the Thunderbird story? Okay. So, I want to start off by and this is where I think I can provide the most incremental value to the listeners who have been following this saga for uh you know five years now since it started getting pitched. Um and so basically um you know there I've heard through the grape vines by talking through um talking to different major shareholders uh of the company um that private equity has been looking at this. They've been doing outreach to private equity firms and they've gotten close to a cash offer for the company, but private equity has stepped away again and again due to the AI risk. And that's really something that you won't find in that's a recent development, so it's not in those writeups that you find on the internet from uh a few years ago. And I think it explains why this stock is so cheap. And I I will get to the AI point, but you basically have 50% of the float held among five to six investment firms that have gotten burnt on the stock and they want they probably want out. Some of them I think are sellers. You know, I won't name the ones that are and the ones that aren't in my opinion, but I'm suspect that there's quite a few of those six, five or six that are sellers of the stock and they're they're tired of kind of the messaging and communication of the company over the years and uh are a little spooked by the fact that they weren't able to get private equity interest in the company up to now. um because obviously that is uh that will spook you like you know when an asset cannot say sell and there's a failed auction process it's understandable that um the valuation will compress and and funds will want to get out of the stock that is the first part so funds are are bearish not bearish but uh thinking about the AI risk and not executing on the transaction because of it um regarding AI what you've discussed and I'm uh I studed Basically, my major in college was basically philosophy. So, I find and my sisters was as well and we are obsessed with AI and I find this is this is probably a discussion that we could have over like a 4-hour podcast if you want to like go into the philosophical implications of what you're talking about. I will just say that I personally uh and I'll provide um a little bit of my knowledge on the space and another stock which is Adobe which has been uh rattled by those same fears. I personally think that the arts is really the last frontier that will be uh that Jan AI will be used will be leveraged to help produce. I think that um there will be I personally think that there will be a major backlash that that AI is going to um uh eliminate a ton of jobs like for instance my job as a consultant at Bay & Company. I will say on the record I think Chat GBT could do a much better job than me. Uh, and I think that there's going to be a lot of jobs that are eliminated. I don't think the job of an animator is going to be one of them. And I think there's it's partly because a client like Disney, which has an incredible brand, and it's associated with the best of the United States and creativity and the arts, they don't want it to be kind of uh automated through Genai. But there's also a legal component, and this is where it gets um, and I'm not an expert on this, but this is where I get more conviction in my thesis. um when you use chat GPT or you use and there's the recent New York New York Times lawsuit that play that is um that connects to this topic but when you use these AI to produce content to generate content um you're using a model a large language model that trained on uh a ton of third-party content that is usually copyrighted and you don't have the copyright. So your um ability to uh ensure that content is truly original is um lacking. And I think this is an area and I think you're going to see um that alone which is like kind of like the depth of my what is a very surface level um uh understanding of the legal legal implications of AI. That alone is uh caused enough for me to like not have this this bearish outlook on the stock due to AI risk. Um, that said, uh, you know, I talked I talked about Adobe and everyone was saying like no one's gonna use Photoshop anymore because, uh, the, you know, Grock, you can go on Grock and you can I I put a photo of my dad on Grock as a joke. And I was like, make my dad appear like a Roman emperor and it did it completely made my dad put a photo of my dad dressed in like a robe with like in a in a coliseum which was hilarious. like but you can't uh that's not the risk like first off if you know anything about Adobe which I think most of Wall Street doesn't know uh the workflows of like a graphic designer or a a product designer Adobe is definitely going to stay in the future uh people for very intricate work which I think is true of animation too in Thunderbird's case you simply can't get at this point in time the the the production value and the value the content and the quality that you you get from doing it the traditional way that has existed over the last few decades. Um but also in Adobee's case uh I saw someone actually pitch it to me as a long because Adobe has been embedding software in its product suite that enables you to look at uh AI generated content and see if it violates copyright. So, it's interesting. The market was bearish on Adobe, but actually Adobe could very well be a uh play on AI. That's just something I wanted to say. I think that um uh I don't want to get too in the weeds or or off topic, but for me, I I think the main thing is the copyright uh issue, which I mentioned, but also like I >> I just to I definitely hear you on the copyright. I mean, I have been wondering recently, I think last week, Warner Brothers sued Midsummer or whatever for, hey, everybody goes in and says, "Make me a 5-second video of Batman doing the Macarena or something." That's IP infringement, right? Like, I I think there are real IP real outstanding IP risks that are really interesting. And I do wonder if five years from now people are pitching in Warner Brothers as a uh you know, hey, they've got a $5 billion value claim against OpenAI or whatever for all this IP infringement they've done. >> I think that's interesting, but I don't think that changes. You've started to hit it on the with the Adobe point, but I still don't think that changes like the AI risk here, right? Just because AI might have some legacy liabilities for uh legacy recent liabilities for IP infringement doesn't change hey what happens if I think there would be two scenarios right a show that a cartoon that used to take 10 cartoonists what happens if you can do it with three cartoonists is that good or bad for three cartoons because you're using AI to supplement them is that good or bad for Thunderbird or is there a world where six years from now a show is you one cartoonist could make 20 shows because you just put the plot for 20 shows into AI. It produces them and then one cartoonist goes and like workshops the the kind of hits or misses that they need to make sure their brand centered which would be if you're the best cartoonist in the world like you could imagine 5,000 year 500 years ago there was the best singer in every city right and they probably made a normal living. Today there's the best singer in the world. You know, it's Taylor Swift and she makes a billion dollars, but there's no room for the best singer in a city. Like, you could imagine right now there's 5,000 animators. Maybe there's only three 10 years from now. And the three that are in demand make a million dollars per year, but there's no room for anyone else. So, I threw a lot out there like how do you think of the AI risk for Thunderbird when I laid it out like that? >> So, basically, you're what you're describing is a situation which I think is going to happen. It's happening virtually every other industry in which AI causes um workers, employees to uplevel, right? To to do more with with le have more output with less employees. Um and I would venture I mean maybe I'm missing something more profound here, but I would say that that is probably going to be a a major plus for the company. Like I think that maybe the you know I the biggest risk I imagine would be Disney realizes that they can just use AI and it's like the cost differential between relying on Thunderbird once you have AI being fully used for the animation process is not enough to to warrant them outsourcing the production. But um I mean it's I think like it's it's I I won't even pretend to know with with certainty how this is all going to play out. And I think no one could say even someone who's an expert in AI um and also an expert in um this industry could really predict what's going to happen. But my my main takeaway is that I think um less like that is probably going to be a good thing for all the players. Um and when we talk about that risk that that you know Disney realizes that they the cost differential isn't enough to to warrant outsourcing to Thunderbird, I think it's not just a cost thing. Um to your prior question also I don't think it's only it's just a cost thing. I think it's also just simplifying the operation. So if Disney can focus on less the creation side and uh more the distribution and the financing and the marketing and the operation side um that just simplifies their structure which leads to better profit. >> Let me ask one you addressed it a little bit but I I mean >> look I I I'm not going to claim to know all the shareholders here go look at the major shareholders but you can Google this. shareholders have wanted this thing sold for years, right? There were multiple proxy fights. Uh I I know several smaller but vocal shareholders who were publishing letters to the board privately, publicly, all this sort of stuff. >> People want the for years the thesis has been hey picks and shovel play in demand sold and I think the management team resisted it and then they ran a process and in late 2024 they called the process off right and as you said part of the reason they called the process off was AI risk. people that know handicap. But, you know, I kind of go back and say, "Hey, you keep hearing the story where this is in demand, growing, great brand. Why with this many shareholders who want it sold, why hasn't this been sold?" Like, you know, like I I think all my all my many many losses have been I buy an asset and I think it should be sold. And there is a reason people say, "Hey, great assets get sold quickly. Bad assets don't get sold." this has been a a slowmoving sale for three years and there's no sale. like why why are you why are bulls why are me looking at this saying hey this is why is the market like it's hammering us hey it's not as good as you think why are we right and the market's wrong there >> so I think it's a it's a good question I think this is to start off prefacing this this is a very assetike business right so um there isn't the way it works is that they are basically project managers for productions so they will hire contract workers even most of the workers on these productions are contract contractors who they hire just on a project basis which is a huge plus of the company because they don't have to have FTEES who are um you know idle and are getting paid when they're not productive. Uh, I think that that like when you're buying something like Disney, like let's say Disney will obviously never be the target of a leverage buyout, but when you're buying something like Disney, you're getting tremendous asset value, right? Disney is not just a a light asset like project manager of projects. They have the IP, right? They have this they have like a hundred years of incredibly high quality IP that I think you judge the quality of IP based on the on how many high margin uh consumer product sales it makes and Disney generates a ton of um billions of dollars from consumer product sales for kids. Uh Thunderbird is lacking that. And so I can understand that maybe this is like something like a wild brain which has the actual asset value from the IP is more attractive to a buyer than Thunderbird which doesn't seem to own like an like an asset. Do you do you understand what I'm kind of trying to say here? Basically that there's there isn't like like concrete asset value in the balance sheet that that would interest like a P buyer. It's a very assetwike kind of business without >> I mean I think you're you're hitting on the the skepticism I I expressed initially, right? Like you don't have real assets. You're you're putting together contracted workers to put these shows together. Uh that seems like a very low multiple difficult business to me. >> Yeah. I mean I think that you don't want to cast it under generalization, right? Because I will speak back again to the channel checks that I did. um they they it is they've done I think one of one of the things I love sorry to take a step back is um this this framework uh produced by a guy called Hamilton Helmer called the seven powers. I don't know if you've heard of it, but it's like the seven things that rely that provide competitive advantage. And one of them is process power. And process power is how efficiently and skilled the company is in executing its production process uh or its manufacturing process. And I think Thunderbird has nailed it from my discussions has nailed this to a tea. They know how to execute. And again, to our point, why doesn't Disney do it in-house? I'd say another reason Disney doesn't do it in house is because they don't think they can be as efficient as Thunderbird. Uh I think Thunderbird is, you know, you look at also a professional services firm. They don't really have much asset value. They're essentially project managers. Maybe they're their employees are not contractors, but um they they they don't have a lot of asset value in the business on the balance sheet. So I think the thing you're getting here is again an incredible brand. You're getting uh uh relationships with the streamers. I think people are like, "Well, I don't know. I Disney signs on for one project. I don't know if they're going to renew it or they're going to give me more projects." I think you can expect that that production service revenue, although it's not contractually recurring, is in all shape or form recurring. And you get um a great reputation and their expertise in process power in making these animated productions. And that's like really what you're getting. And I think that this company there's going to come a point and you're you're asking me why now. Uh there's a couple reasons why now. There this can't go that much lower, right? I would say that uh a good valuation is like I've told myself that before. >> Yeah. But I don't think like there's obviously three ways to make money on a stock, right? The fundamentals improve, there's a rerating or the cap the capital sector deleverages. They have a net cash balance on the balance sheet. they uh have uh been growing their fundamentals, their their cash flow and their revenue uh pretty consistently. They um and they're mindful about their growth and they've had a tremendous derating from 2021 when they were >> Let's talk cash. I I want to wrap up with one question. You mentioned you kind of alluded earlier and I'm really interested in this. Look, I was joking because they said on their call, they said continent is king is cash is king. And there can only be one king unless we're going to war and we have multiple empires and everything, but there can generally only be one king. You know, you've got this stock just shelled out. Multi-year shelled out. Shareholders, again, I'd go back to the chronic call. I'd go back to the shareholder letters, everything. Shareholders are frustrated. A lot of people throw in the towel. you've got tons of cash on the balance sheet and as you said a generally asset light company and the company comes on the Q3 call and says hey I do remember one shareholder suggested they start making animations for Donald Trump which I thought was kind of funny but you've got shareholders come on the call and say hey why don't you buy back stock right you've got all this cash asset light business and they say cash is king we can't buy back stock we want to have a strong balance sheet we want to maintain and I get that but asset light shell out stock the low valuation like It kind of seems to me the one of the knocks on Thunderbird for the past 15 years is hey these guys want to go like all media people these guys want to go empire built they want to go buy stuff and when you've got a stock this low and they refuse to use the share repurchase it just kind of looks like to me like hey these guys want to buy stuff they they don't really want to they >> yeah so I I just want to end with that discussion >> this is yeah let's end with that discussion I think that is like where the Shakespeare Shakespearean drama unfolds you have on one side Vos Capital who's is an investor I really respect. And then you have uh on the other side Marne Weisshoffer who's a former board member and the CFO of a former CFO of Lionsgate. Um and Frank Gustro was the founder and then kind of in the middle you have Jennifer McCarron brokering a peace deal and this was in the proxy battle which took place two years ago but I think outlines speaks to your point. Marty Weissoff and Frank Gustro wanted to build the next Lionsgate. And they were convinced that if you continue what they call batting singles, investing in your own IP, taking the cash flow from the production service work and investing it in your own uh children animated productions that you own the IP to that eventually you're going to strike gold. And they they did it with Lionsgate. They transformed Lionsgate from a small Vancouver studio to a global player uh with that strategy. And then you have Voss Capital which is like I want to do financial engineering. It's a similar situation actually to uh Bill not Bill Aman Dan Lope u maybe five or six years ago he was uh launching an activist fight against Sony and he was talking about how there needs to be less investment into owned IP in Sony films and their and their creative side and uh George Clooney actually wrote a letter saying no they have to continue creating. It's a debate. Um, I think I personally >> Does George Clooney own a lot of Sony stock? >> Say what? >> Does George Clooney own a lot of Sony stock? >> Maybe he does. He's definitely an actor in Sony, but I I >> No, but my point is like, yes, for an actor who gets paid and does projects and stuff. the it's very easy to say oh they really need to create like you know I I'm very familiar with these studios and especially postcoid but even before I think the debate was hey yes they are creating but it seems like all the returns from them creating are really going to the actors and the directors I don't know how much of it is actually >> of course I'm sure I'm sure George has way less skin in the game than Dan Lo I'm not trying to imply that they're equals but uh I just wanted to use that to uh illustrate the point that um I'm trying to make which is that you can play and this is true of anything. You can reinvest in the business or you can do financial engineering. That's just a common theme when it comes to corporate governance and it's an interesting debate. I ideally would like to see a mix of the two because I think that they can they option the rights to last kids on earth for like less than $10,000. So I think they can meaningfully invest in IP while buying back more of their stock. This gets to the major point for regarding which I feel like we've been walking talking about all kinds of things on this episode and we didn't even get to this point which is the major catalyst at the end by the end of this year they are uplisting to the TSX uh exchange the Toronto exchange not the Toronto venture exchange which is the major exchange in Canada and there are rules and I think this thing is so cheap not just because people are spooked by a failed auction process but because it's just so illquid like I said at the start of the episode $75,000 of stock were traded yesterday. So really no institutional player can own this anymore. And there are rules in I don't know the exact ones but in the Toronto Toronto exchange there are rules regarding how much stock um you like a minimum amount of stock that you have to buy if you're doing buybacks as a percentage of the float. Whereas in the TSX Venture Exchange there's a limit of 10% of the float that you can buy back uh do share buybacks on. And I think just being on that exchange, having more visibility, having a larger set of mandatory buybacks is going to increase liquidity way more and we would see this thing at least rerate to 3 to 4x, which is, you know, would be a great outcome for anyone coming into the stock right now. Um, but I think yeah, I think that would be a major catalyst. It's something that I I think there's a theme also and I I consider the CEO to be fantastic CE CEO. I think Jennifer McCarron's a great CEO. I think she's very mindful. She doesn't want to just um do the quick thing to like get a rerating. Uh they were looking at doing a NASDAQ uh up listing in 2021 uh 2022. They shoved that idea because they didn't want to they thought it could flop like they thought that the IPO would be unsuccessful in the NASDAQ which I thought was an unfounded fear and also because they had you know 1 to 2 million capital markets fees which was very sizable for a company of their size. Uh I think that they have been very cautious um in and and in kind of gearing towards just investing in the business versus doing very tangible corporate actions that would rerate the stocks. But I think you're starting to see a change. I'm sure I haven't been able to talk to Boss Capital um because uh for various reasons, but uh I'm I know that they're still pressuring them. I know that this um move to do an OP listing was probably prompted by them. And I think you're going to see I think the more time that the management can't execute and strike gold, like strike the next uh pep of the pig, the more the less credibility they have and the more likely they're going to succumb to investor pressures to do the buybacks um to to do actions that will will raise the stock. And that's that's the truth of the matter. I mean, um I think when you when why am I in this? I'm in this because it's trading at 1.6 times uh EBITA, which is outrageous for a business of this quality. Uh >> look, I mean I I I just that's the thing like as I'm asking these questions, discussion like I feel like I should have led every question off with like but it's trading at 1.6 times IBIDA and like they get all the tax credits you talked about and it's asset light. There is amortization in there but you know I don't think it's a stress to say this is four times after taxfree cash flow is kind of multiple. like all the questions I have it should I feel like the answer should just be but it's trading at four times free cash flow right like so that's that's the crux of the that's the it's a tough thing with these really small micrs look I've got a hard top I think so anything else you think we should have hit on or touched on >> no I would just harp on the point that I think the main issue I I don't think uh it's been as publicly uh talked about I think people in the buy side in these circles who increasingly are not buyers of stock due to liquidity constraints know that the they had a failed process. I think the average retail investor is not aware of those dynamics because really the only outside communication was that they um it did a strategic review in 2023 which determined that they it was in their best interest to remain a standalone public company. Uh but I think what you're going to see is that the liquidity which has been a big uh issue for the stock is going to meaningfully improve when they uplist in a few months by a few months to the Toronto exchange. And uh that alone could drive a rerating. And the last thing which is I think I think I didn't talk about this enough and I I want to end with this note. Um but I do think we're reaching a reaceleration of the content wars. I think if you look at the history of the the streaming wars at first it was full intensity the time of peak TV from 2020 to 2022 then you had uh this era in which profitability was paramount then you have what's called the frennemy era which is when they were bundling the bundling economy started happening and you see like HBO Max partnering with Disney to put uh Hulu and Disney Plus and Max under one bundle. Um, I don't people look at that new rise in bundling and they say, "Hey, I don't think I think the streaming wars are over. There's going to be a consistent rain back in content spending." And I really don't think that is the case to be honest. I think that right now four, they've done consumer surveys that show that the average American household has four streaming subscriptions. uh and that the I don't know the percentage but more than 50% of American of those households uh want to rationalize their spending and cut back on their subscriptions. And then you also have data that shows that only one in five um uh streaming subscription services uh among the average household was purchased through an indirect channel which is in other words a bundle like Verizon Plus or or or the previous bundle I mentioned the Disney HBO one. I think I I have this view which I didn't talk a lot about and it's controversial. I'm sure people will disagree with it that there's going to be a real acceleration in content spend because uh content is really what differentiates these platforms for the end consumer. Okay, cool. Uh it's a yeah it's a view. Uh anyway, look, this has been great. Uh Thunderbird Entertainment, Franco from Sofon Capital Research, thanks so much for coming on and uh we'll talk soon. Thank you. >> A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.