Sophon Capital 的 Thunderbird Entertainment 投资逻辑 $TBRD

It's going great. It's a huge honor to follow in the footsteps of one of my close friends and former boss, Nate Sacks, who has been on your podcast multiple times. I just wanted to give a shout-out to Nate and Papyrus Capital. I'm really excited today to talk about Thunderbird Entertainment.

Before Franco dives into everything, I have to give a quick disclaimer: Nothing on this podcast is investment advice. We're talking about a very illiquid micro-cap Canadian entertainment company, so it carries extra risk.

Franco, you spilled the beans, but let's just jump into it. What is Thunderbird Entertainment, TBRD in Canada, and why are they so interesting?

1. Thunderbird’s Unusually Cheap Valuation

Thunderbird Entertainment is a very quirky stock, and I would reiterate once again that people should do their own due diligence. This is a highly illiquid stock. It has a market capitalization of about $75 million Canadian, which I think today equates to about $50 million U.S. Yesterday, it traded, I think, $75,000—not shares, dollars—in volume.

This is a very tiny stock. Investors have gotten burned on it, and there are a lot of people who are disappointed in how it has performed over the last few years. But Thunderbird is interesting because it falls directly into what our firm is looking for. To give you some context, we initially looked at the full spectrum of market capitalization, from companies as large as eBay to things as small as Thunderbird.

Today, we're building out a project called Sofon Micro Cap Atlas, which is our new research platform on Substack. We're trying to cover micro-cap companies, which we define as companies under $500 million in market capitalization that are investable businesses. They're high-quality businesses, and hopefully we can get them at a fair to great price.

When you think about those 2 buckets, I don't like the dichotomy between value and GARP. I think everything is value, right? Value is what you get for what you pay. But really, we're looking for investments that fall into 1 of 2 categories: great businesses that you can get at a fair price, and fair businesses that you can get at a great price.

When you think of that matrix, or that Venn diagram, and look at the intersection, Thunderbird falls squarely in the middle. This is a business that I would say is very good. Some might argue that it's a great business, but I'll call it a very good business that you can get at an undeniably outstanding price: less than 2 times next-12-month EBITDA.

When you look at a valuation like that, the only stocks I've really seen trading at those valuations right now are tiny net-nets on the Hong Kong Stock Exchange, businesses that are facing terminal decline, businesses that are not audited by the Big 4, or businesses—say, a Greek shipping company—where the owners are enriching themselves. This is a very well-run, well-managed company. It has had an activist and a proxy battle, and there's a whole history with the company over the last 5 years, but this is a company that, in my mind, has very good corporate governance.

Let's just pause there. That was great background, but I don't think we've said what Thunderbird is and what it does. Let's back up and say what Thunderbird is and what it does.

2. The Three Business Models

Sure. Thank you for guiding me. I feel like I'm going in different tangents. It's a very simple business: a TV and film content production studio. It's headquartered in Vancouver, Canada. It has a presence in Toronto, and it also has studio facilities in Burbank, which is in Los Angeles, and Ottawa, in Canada.

This company works under 3 economic models. The first economic model is service work. This is work in which Thunderbird gets hired by a TV network or streaming platform to do production work in exchange for a fee. They don't retain any ownership of the intellectual property. It's very low-risk, fee-for-service work. Thunderbird gets its costs, except for labor, cash-flowed throughout the production process.

The next model is owned-IP development. Thunderbird also makes its own content, which it pitches to networks and streamers. Like a typical Hollywood studio, it retains the value of the intellectual property, and it can monetize it through licensing deals, consumer products, and other revenue streams.

Just like J.K. Rowling has the rights to the Harry Potter intellectual property and can make money from the sale of pillow shams with Gryffindor emblazoned on them, Thunderbird does both. The third economic model is really a hybrid of those 2, and it's partnership work.

In partnership work, Thunderbird literally handles the entire production for the network or streaming platform, soup to nuts. It does everything from pre-production to writing to animation, which is less common in the service-work model. In service work, it handles a big part of the production, but it doesn't handle all of it.

With partnerships, it can handle pretty much all of it. It gets paid an even larger fee in exchange for that work, and on top of that, it gets some of the backend economics, mainly from consumer-product sales.

I've watched your podcast so many times that I know the format. I know I'll be entering a line of fire of questioning, but there are so many ways we can go with this stock. It's interesting because, at first glance, it's a simple business. There's a lot of history with it.

The last thing I want to say before we dive in—and then I'll leave the floor to you—is that what I described earlier is our bottom-up framework for looking at stocks. We're also very interested in investing thematically in stocks that have a compelling set of top-down themes.

I think 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 am informed about it. You probably have more informed views than I do, but I'm informed enough to have my own contrarian view that the streaming wars are going to reaccelerate.

If that happens, Thunderbird is in a unique position. It's really a pick-and-shovel trade because you're not betting on any 1 of the streaming platforms specifically.

They currently have 15 partners—everything from Nickelodeon to Netflix, Max, and Disney—that they all work with. So, they work with all the players. And they have 24 productions with those 15 players. Really, you’re getting 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, the stock of Paramount—there are issues there, too. But let me try to back up and make my bones as a podcaster. Thunderbird has been, despite its small-cap size and illiquidity, a very popular play among smaller value-investing people for years. You mentioned the proxy fight; people can go look at the history there. I think that’s a stable business, but we can talk about any of that. It’s been a popular play for a lot of the reasons you laid out, right?

People say—

Yeah.

People look at this and say, “Hey, it’s really cheap. EV/EBITDA is low single digits to mid-single digits, depending on the day and the time you buy it,” right?

Very low single digits. Very low.

It’s very cheap. People have mentioned the picks-and-shovels play. I’ve been hearing about the picks-and-shovels play for a while with Thunderbird. I think TBRD was one of the ways I prepped. If I had to guess, I would believe you were one of the 2 analysts on the TBRD call, but don’t confirm or deny, because VIC is anonymous.

I read the TBRD call, and the comments have all sorts of stuff: bulls, bears, skeptics, and people learning. There was clearly a bull and a skeptic, and the skeptic kept saying, “Hey, I was there. I was bullish on Thunderbird 2 years ago at $4, and now we’re 2 years later at $1.50.”

A lot of what you laid out—the partnerships, the picks-and-shovels streaming play, and all this sort of stuff—I have thoughts on all of it. But if I just took that away and said, “Hey, this has been the case for 4 years,” why hasn’t it worked? What’s gone on? For 4 years, you’ve heard “picks-and-shovels play” and “cheap stock,” and it’s just gotten cheaper. It hasn’t grown that much. Why hasn’t this worked already?

Okay. 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 Investors Club since 2020. It’s not a new idea, and I would tell our listeners to refer to those publicly available sources to get up to speed on the business, which hasn’t really changed.

Thunderbird has been going through a period of extreme transition. Maybe I can give a little history on the company, because I think that’s really going to be helpful to understand how it’s evolved and who the different actors are. It’s almost like a Shakespearean drama—what’s been going on there over the last 5 years.

Thunderbird was founded over 2 decades ago, in 2003, by the former president and CEO, Tim Gamble. They initially had the goal of investing in and exploiting intellectual property and helping build major global brands. From the very beginning, they had an IP-driven strategy.

Over the years, the business started moving toward more production—the actual production work—and then buying IP. In 2011, they had a big, pivotal moment when Frank Giustra was one of the main players in why things changed with Thunderbird.

Frank Giustra is a former, I believe, mining entrepreneur from Canada who founded Lionsgate. He basically provided an investment that was used to acquire the IP rights to the Blade Runner franchise. That was a big moment for them because they were starting to acquire actual IP. Today, his foundation is a 10% shareholder in the company.

The business further transformed itself through a series of acquisitions. In 2014, they bought Great Pacific Media. GPM is the division of Thunderbird today that makes what’s called factual content: live-action content that’s unscripted, like reality TV and documentaries. Some of those have been low-cost, high-margin productions that they can do and that are renewed in many cases. An example would be Highway Thru Hell, which is one of the longest-running reality TV series of all time.

In 2016, they bought what has really become the crown jewel—the flagship piece of the business—which is their animation studio, Atomic Cartoons. I think I have a lot more to offer regarding that division that isn’t in the prior write-ups you’ll find on the internet about the company.

In 2018, they did almost like a SPAC transaction. They merged through a reverse merger with Golden Secret Ventures, which was a defunct mining company—a public shell company trading on the TSX Venture Exchange. This is also an important point to make, and I’ll come back to it regarding why things are different today.

The TSX Venture Exchange—I’ve never owned another stock on the TSX Venture Exchange, but looking at it, there’s an Australian investor whom I absolutely love. He’s pretty high-profile and he’s on Twitter. He’s a hedge fund manager who specializes in shorting companies, and he says that Vancouver, Canada, is like the hotbed of financial fraud globally.

Boca Raton might like a word with that.

Yeah, but when it comes to publicly traded companies, it’s funny you say that because I’m right now just outside Miami. This is where I now live. South Florida is very sketchy when it comes to doing business.

Back to the point: Vancouver is a hotbed for financial crime and fraud in the stock market and in public equities. About 50% of the companies on the TSX Venture Exchange are mining companies, and there’s a sizable percentage of those that are probably, in some way, shape, or form, fraudulent. I’m not exaggerating when I say that. It’s really not a high-profile market.

3. Why Disney Outsources Animation

I think I know where you’re going. We can come back to the venture exchange later, but I just want to focus on the business for a second, right? The big driver here is Atomic, their cartoon division.

Yeah. And when I hear bulls talk about it, I think the 2 things I’ve heard—and, as you said, people can go read their write-ups. There are countless numbers of them.

The picks-and-shovels play, right? These guys’ big partnership right now is on Spidey and His Amazing Friends, a kids’ Spider-Man show on Disney. 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—the picks-and-shovels play, the more-streaming angle. There are lots of ways we could break that out, but I would just ask: Why does Disney decide to work with them?

Disney has a lot of in-house animators. When you say, “Hey, Disney’s working with them,” I say, “Hey, that’s cool.” But I can’t imagine that Disney, with all its in-house animators and everything, is outsourcing to these guys for any type of material profit, right?

On their last call, I was kind of joking: Thunderbird said, “Content is king,” and then they said, “Cash is king.” So I was like, which one is the king? But they said content is king, and to some—

It’s not mutually exclusive. I’ll just say something. I read this in the Q3 call. When they say that, I know the paragraph, and it’s not mutually exclusive. What they’re saying is that they really want to 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. If they were willing to do that—

Let me just stay on that point. 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 in their Atomic division, when they’re working, they’re not either. To me, that suggests they’re not going to be able to generate economic returns on that.

So I just ask: Why does Disney choose to work with them, and 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 correctly. You’re saying that they’re doing neither. They’re not generating cash. You said something just now that I want to make sure I’m capturing correctly: that they’re doing neither.

I’m saying that if I think—like, in media, content and distribution are king, right? All the returns on any deal are going to flow to the person who has either elite IP, like Disney. They’re going to get all the returns for something, or to whoever 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 Spidey and His Amazing Friends or anything, I look at that and say it’s not a picks-and-shovels 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 by making this for $4.5 million, go at it.” But to me, I don’t think they can really make a profit on doing that.

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 less than Disney’s in-house cost. So Thunderbird is earning a cost-of-capital return.

And it’s not that they’re not going to make a return; they’re just going to make a subpar or at-cost-of-capital return. I think that’s just a commodity business, and I don’t see how it’s that valuable.

Okay, so there are a lot of points that I want to talk about there, and I apologize. I’m not usually this scattered, but genuinely, there are so many avenues you can go down when talking about Thunderbird, and you can get lost in the weeds. So thank you for redirecting me.

Regarding your point about Disney and outsourcing, as you know, the streaming wars in the beginning—in 2020 and 2021—were all about growth at any cost. Wall Street was rewarding a set of metrics that weren’t really profitability- or cash-flow-driven. It was really about subscriber growth and topline growth.

That obviously changed in 2022 and 2023, when the cash burn and the losses were starting to become very evident. The studios needed to rein in content costs, and there was a pullback in spending. One thing I’ll note, which is slightly off-topic but worth noting here, is that in 2023, Thunderbird, unlike most other players in this industry, grew revenue, which speaks, I think, to their ability to weather downturns in the ecosystem they’re in.

But we’re now in an era where profitability is the most important thing. There needs to be, I’d say, high-single-digit to low-double-digit revenue growth, but you want to have profitable growth. You don’t want to have explosive growth and worry about profits later.

It is, I think, an intelligent cost-cutting measure for Disney, and it simplifies Disney’s model if they ax the in-house animation team and outsource it to a player like Thunderbird. Thunderbird is the leader among the types of companies that do what they do. That’s exactly what Disney did when they acquired Marvel Comics: They shut down their in-house animation team in Burbank and outsourced the work to Thunderbird.

The reason they did that is because Thunderbird is the lowest-cost producer of elite animated content in the world. I’d say that’s actually one of the main risks I’ve identified. If, for instance, Malaysia, India, or China—though I doubt Disney would outsource its animation production to China—opens up as a low-cost producer because of low labor costs for content production, then Thunderbird’s position could be jeopardized.

Let me just finish with one last thing. Thunderbird benefits from a series of tax credits, refundable tax credits, and incentive programs in Canada that you can stack on top of each other. They get a 25% rebate on labor costs through the Canada Media Fund. They get refundable tax credits from the federal government, and they also get refundable tax credits from the province of British Columbia, where Vancouver is based.

That’s actually why Vancouver has become this hotbed for animators: because of the environment. When you stack those credits up, you can rebate up to 75% of your labor costs on your production. That gives Thunderbird the ability to be a low-cost producer and also bid aggressively on projects where other players economically can’t match them on the bid.

I’ll be quiet now, but that’s what I’m hinting at: They’re a low-cost producer. They’re also in the same time zone as California. Culturally, Canada is very similar to the U.S. I think if you looked at companies in the 1990s in the U.S., like large technology companies, they outsourced everything to India, including IT work.

I worked at Goldman Sachs, and I was in the TMT group in San Francisco. We had an analyst who worked out of Bangalore and did all the modeling. The reason Goldman Sachs had that analyst instead of having the work done in-house was the clear cost advantage of Indian labor.

That’s something I really think is worth harping on: This is one of Thunderbird’s biggest competitive advantages, and I probably should have mentioned all of this at the beginning. It’s literally one of the advantages that competitors cannot really replicate, because they’re not based geographically where Thunderbird is.

Well, let’s go back to the Disney example.

Yeah.

Disney uses Thunderbird for Spidey and His Amazing Friends, right? And Disney does What If...? through Marvel Studios Animation, which I believe is made in-house, right? So why does Marvel go with Thunderbird for Spidey and not for What If...? And why does Disney go in-house for What If...? instead of outsourcing it to Thunderbird?

The Canadian tax credits—I hear them mentioned all the time, and they’re nice, but Georgia has tax credits, too, and everybody starts shooting in Georgia. Ultimately, tax credits are nice to me, but they’re just a way of lowering the cost of capital, and everyone can get them.

So I guess my two questions are—or we could wrap it into one—why doesn’t Disney choose, for Spidey and His Amazing Friends, to say, “Hey, let’s just hire 5 Vancouver-based Disney employees and have them produce Spidey and His Amazing Friends”? And on the other side, 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 we did for Spidey.” What’s driving that?

That’s a really good question. To be honest, I did a lot of channel checks, but the channel checks I did didn’t provide me with too much insight into that question. Really, what you’re asking is why Disney would just build its own studio in Vancouver, for instance. Why would they even have to rely on Thunderbird’s Vancouver animators?

The truth of the matter is, I mean, it comes down to the question of why firms in general outsource. To your point, with the Georgia tax credits, there are also tax credits in Florida. I don’t think they come nearly close to the tax credits you get in British Columbia.

I lived part of the year in Los Angeles, and I have a good network of people in the media and entertainment space. I did probably just shy of 30 interviews with everyone from talent agents to people at the streaming platforms, former employees of the streaming platforms, creators like writers and animators, and producers.

The feedback we got is that Thunderbird’s reputation in this industry, regarding its execution and really its corporate brand, is almost like the type of brand that Goldman Sachs would have. I’d call them the Goldman Sachs of animation, since their main business—90% of it—is the service side. I’d say they’re almost like a professional-services firm for creative work.

They bid on projects. That’s kind of how they function, right? It’s similar to McKinsey for animation. I think they’ve executed so well—the feedback was completely consistent and resounding—that they have this incredible track record of being highly reliable and having extensive capabilities that enable them to work with the most demanding partners, like Disney.

Disney, by the way, has the most demanding specifications in the industry for its content, its characters, and how the animation looks. Pretty much no one, or very few people, come anywhere close to that. I think these companies have had such a hugely successful experience working with Thunderbird. Thunderbird has proven time and time again that it’s a good partner to work with.

That’s evidenced by the fact that it’s not just Spidey and His Amazing Friends; it’s also Iron Man. They’ve done work on 101 Dalmatian Street and all the Disney franchises they’ve worked on, and Disney continues to provide them with work.

It’s also evidenced by the hit rate they have on the IP development side, in terms of the number of productions that they successfully pitch to their network and to their clients on the service side. That hit rate is above 80%.

I’m by no means an industry participant 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 why reinvent the wheel, mixed with the cost advantage.

Yeah, let me quickly ask about the hit rate. I think I heard on the Thunderbird call as well that both sides mentioned the hit rate. Anybody who’s done what you mentioned—Goldman Sachs or consulting—knows that that is a very high rate.

What is the standard hit rate when you’re pitching production and design for cartoons? What does a hit rate look like?

That’s a good question.

I imagine it's incredibly low. I would say a single-digit percentage, because if it's really people who are pitching—and this is not production and service work—this is, I think, what you're thinking of when you mentioned Goldman Sachs, on the bidding side. When they bid on a project, we're talking right now about the owned-IP development, not this RFP rate, which is for the service side.

The owned-IP development is 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, and we want to pre-sell you the show.” Their hit rate on that, the CEO has indicated, is higher than 80%.

4. AI Changes The Production Economics

Okay. Let me go to AI. This is concerning on the IP side too, but I could imagine a lot of ways AI helps them. You could imagine, “Hey, we used to need to have 10 designers on this project. Now we only need 3 because AI does so much work.” Our margins go up, and we can handle much more work. All this sort of stuff.

I could imagine, “Hey, the IP is where the money really is. AI helps us speed up IP,” and all this sort of stuff. On the other hand, I could imagine you say, “Hey,” to go back to Disney, I remember they did—what was it?—Disney’s *Secret Invasion* or something. There was a big controversy where the title cards were all generated by AI. This was right when AI was really starting to roll out, and people were up in arms.

But I could imagine you saying, “Hey, AI is getting so good.” You look at the stuff Elon Musk is tweeting in these videos and everything. I could imagine saying, “Hey, there’s just not even a need for a design and production studio anymore. The IP owners can all work with AI to create exactly what they want.”

I would pause there. I propose 2 ginormous chasms: AI is a huge benefit for them, and AI is death for them. How does AI fit into the Thunderbird story?

I want to start off by saying—and this is where I think I can provide the most incremental value to the listeners who have been following this saga for 5 years now, since it started getting pitched—that I’ve heard through the grapevine, by talking to different major shareholders of the company, that private equity has been looking at this. They’ve been reaching out 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.

That’s a recent development, so it’s not in the write-ups that you find on the internet from a few years ago. I think it explains why this stock is so cheap. You basically have 50% of the float held among 5 or 6 investment firms that have gotten burned on the stock, and they probably want out. I won’t name the ones that are and the ones that aren’t, in my opinion, but I suspect that quite a few of those 5 or 6 are sellers of the stock.

They’re tired of the messaging and communication from the company over the years, and they’re a little spooked by the fact that they haven’t been able to get private-equity interest in the company up to now. Obviously, that will spook you. When an asset cannot sell and there’s a failed auction process, it’s understandable that the valuation will compress and funds will want to get out of the stock.

That’s the first part. Funds aren’t necessarily bearish, but they’re thinking about the AI risk and not executing on the transaction because of it.

Regarding AI and what you’ve discussed, my major in college was philosophy. My sister’s was as well, and we are obsessed with AI. I find this is probably a discussion that we could have over a 4-hour podcast if you want to go into the philosophical implications of what you’re talking about.

I’ll just say that I personally—and I’ll provide a little bit of my knowledge on the space and another stock, Adobe, which has been rattled by those same fears—think that the arts are really the last frontier where GenAI will be leveraged to help produce. I think there will be a major backlash. AI is going to eliminate a ton of jobs. For instance, my job as a consultant at Bain & Company—I’ll say on the record that I think ChatGPT could do a much better job than me.

I think there are 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. Partly, it’s because a client like Disney, which has an incredible brand associated with the best of the United States, creativity, and the arts, doesn’t want it to be automated through GenAI.

But there’s also a legal component. There’s also the recent New York Times lawsuit that connects to this topic. This is where it gets interesting. I’m not an expert on this, but this is where I get more conviction in my thesis. When you use ChatGPT or other AI to generate content, you’re using a large language model that trained on a ton of third-party content that is usually copyrighted, and you don’t have the copyright.

Your ability to ensure that the content is truly original is lacking. I think this is an area where you’re going to see that alone—which is the depth of my very surface-level understanding of the legal implications of AI—causes me not to have this bearish outlook on the stock due to AI risk.

That said, I talked about Adobe, and everyone was saying, “No one’s going to use Photoshop anymore,” because you can go on Grok and generate things. I put a photo of my dad on Grok as a joke and said, “Make my dad appear like a Roman emperor.” It completely made my dad appear in a robe, in a coliseum, which was hilarious.

But that’s not the risk. First off, if you know anything about Adobe—which I think most of Wall Street doesn’t know—the workflows of a graphic designer or a product designer, Adobe is definitely going to stay in the future. 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 production value, content value, and quality that you get from doing it the traditional way that has existed over the last few decades.

But also, in Adobe’s case, 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 AI-generated content and see if it violates copyright. It’s interesting: the market was bearish on Adobe, but Adobe could very well be a play on AI.

That’s just something I wanted to say. I don’t want to get too in the weeds or off topic, but for me, I think the main thing is the copyright issue, which I mentioned.

I definitely hear you on the copyright. I’ve been wondering recently—I think last week, Warner Bros. sued Midjourney because everybody goes in and says, “Make me a 5-second video of Batman doing the Macarena,” or something. That’s IP infringement, right? I think there are real, outstanding IP risks that are really interesting.

I do wonder if, 5 years from now, people are pricing in Warner Bros. as having, you know, 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 the AI risk here. You’ve started to hit on it with the Adobe point, but I still don’t think that changes the risk. Just because AI might have some legacy liabilities—some recent liabilities—for IP infringement doesn’t change what happens if—

I think there would be 2 scenarios. A show, a cartoon, that used to take 10 cartoonists: what happens if you can do it with 3 cartoonists? Is that good or bad for the 3 cartoonists? Because you’re using AI to supplement them, is that good or bad for Thunderbird?

Or is there a world where, 6 years from now, 1 cartoonist could make 20 shows because you just put the plot for 20 shows into AI? It produces them, and then 1 cartoonist goes and workshops the hits or misses to make sure they’re brand-centered.

If you’re the best cartoonist in the world, you could imagine that 500 years ago there was the best singer in every city, and they probably made a normal living. Today, there’s the best singer in the world. It’s Taylor Swift, and she makes $1 billion, but there’s no room for the best singer in a city.

You could imagine that right now there are 5,000 animators, but maybe there are only 3 10 years from now. The 3 who are in demand make $1 million per year, but there’s no room for anyone else.

You’ve thrown a lot out there. How do you think of the AI risk for Thunderbird when I lay it out like that?

So, basically, what you’re describing is a situation that I think is going to happen. It’s happening in virtually every other industry, in which AI causes workers to uplevel—to do more, to have more output with fewer employees.

I would venture—maybe I’m missing something more profound here—but I would say that this is probably going to be a major plus for the company. I think the biggest risk I imagine would be that Disney realizes it can just use AI, and the cost differential between relying on Thunderbird once AI is fully used for the animation process is not enough to warrant outsourcing the production.

I won’t pretend to know with certainty how this is all going to play out. I think no one could say—even someone who is an expert in AI and also an expert in this industry—what’s going to happen. But my main takeaway is that this is probably going to be a good thing for all the players.

When we talk about that risk—that Disney realizes the cost differential isn’t enough to warrant outsourcing to Thunderbird—I don’t think it’s just a cost thing. To your prior question, I also don’t think it’s only about cost. I think it’s also about simplifying the operation. If Disney can focus less on the creation side and more on distribution, financing, marketing, and operations, that just simplifies its structure, which leads to better profit.

5. The Failed Sale Process

Let me ask one—you addressed it a little bit, but, look, 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. I know several smaller but vocal shareholders who were publishing letters to the board, privately and publicly, all this sort of stuff.

People have wanted this sold for years. The thesis has been, hey, picks-and-shovels play, in demand, sold. I think the management team resisted it, and then they ran a process. In late 2024, they called the process off, right? As you said, part of the reason they called the process off was AI risk.

But I kind of go back and say, “Hey, you keep hearing the story where this is an in-demand, growing, great brand.” Why, with this many shareholders who want it sold, hasn’t this been sold? I think all my many, many losses have been that I buy an asset and think it should be sold. There is a reason people say, “Hey, great assets get sold quickly. Bad assets don’t get sold.”

This has been a slow-moving sale for 3 years, and there’s no sale. Why are bulls like me looking at this saying, “Hey, this is great”? Why is the market hammering us, saying, “Hey, it’s not as good as you think”? Why are we right and the market’s wrong there?

I think it’s a good question. To start off, this is a very asset-light business. The way it works is that they are basically project managers for productions. They will hire contract workers. Even most of the workers on these productions are contractors whom they hire on a project basis, which is a huge plus of the company because they don’t have to have FTEs who are idle and getting paid when they’re not productive.

When you’re buying something like Disney—let’s say Disney will obviously never be the target of a leveraged buyout—you’re getting tremendous asset value, right? Disney is not just an asset-light project manager. They have the IP. They have about 100 years of incredibly high-quality IP. I think you judge the quality of IP based on how many high-margin consumer product sales it makes, and Disney generates billions of dollars from consumer product sales for kids.

Thunderbird is lacking that. I can understand that maybe something like WildBrain, which has actual asset value from the IP, is more attractive to a buyer than Thunderbird, which doesn’t seem to own an asset. Do you understand what I’m trying to say here? Basically, there isn’t concrete asset value on the balance sheet that would interest a PE buyer. It’s a very asset-light kind of business.

I think you’re hitting on the skepticism I expressed initially, right? You don’t have real assets. You’re putting together contracted workers to put these shows together. That seems like a very low-multiple, difficult business to me.

I think you don’t want to generalize, because I’ll speak again to the channel checks that I did. One of the things I love—sorry, to take a step back—is this framework produced by a guy called Hamilton Helmer called 7 Powers. I don’t know if you’ve heard of it, but it’s the 7 things that provide competitive advantage. One of them is process power.

Process power is how efficiently and skillfully the company executes its production or manufacturing process. From my discussions, I think Thunderbird has nailed this to a tee. They know how to execute. Again, to our point, another reason Disney doesn’t do it in-house is because they don’t think they can be as efficient as Thunderbird.

You can also look at a professional services firm. They don’t really have much asset value. They’re essentially project managers. Maybe their employees are not contractors, but they don’t have a lot of asset value in the business or on the balance sheet.

What you’re getting here is an incredible brand, relationships with the streamers, and a great reputation. I think people are like, “Well, I don’t know. If Disney signs on for one project, I don’t know if they’re going to renew it or give me more projects.” I think you can expect that production-service revenue, although it’s not contractually recurring, is recurring in all shapes and forms.

You get a great reputation and expertise in process power in making these animated productions. That’s really what you’re getting. I think there’s going to come a point—and you’re asking me why now. There are a couple of reasons why now. This can’t go that much lower, right?

I would say that a good valuation is—I’ve told myself that before.

Yeah, but I don’t think—there are obviously 3 ways to make money on a stock, right? The fundamentals improve, there’s a rerating, or the capital structure deleverages. They have a net cash balance on the balance sheet. They have been growing their fundamentals, their cash flow, and their revenue pretty consistently. They’re mindful about their growth, and they’ve had a tremendous derating from 2021.

Let’s talk cash. I want to wrap up with one question. You mentioned it—you alluded to it earlier—and I’m really interested in this. I was joking because they said on their call, “Content is king. Cash is king.” 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’ve got this stock that just sold off—a multiyear sell-off. Shareholders, again, I’d go back to the quarterly call, 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.

The company comes on the Q3 call and says—one shareholder suggested they start making animations for Donald Trump, which I thought was kind of funny—but you’ve got shareholders coming on the call and saying, “Hey, why don’t you buy back stock? You’ve got all this cash, an asset-light business, and a low valuation.”

They say, “Cash is king. We can’t buy back stock. We want to have a strong balance sheet. We want to maintain it.” I get that, but with an asset-light business and the stock sold off, it kind of seems to me that one of the knocks on Thunderbird for the past 15 years is, hey, these guys want to empire-build, like all media people. When you’ve got a stock this low and they refuse to use the share repurchase program, it just kind of looks to me like these guys want to buy stuff. They don’t really want to—

Yeah, so I just want to end with that discussion. This is where the Shakespearean drama unfolds. On one side, you have Voss Capital, which is an investor I really respect. On the other side, you have Marnie Waisman, who’s a former board member and former CFO of Lionsgate, and Frank Giustra, who was the founder. In the middle, you have Jennifer Twiner McCarron brokering a peace deal.

This was in the proxy battle, which took place 2 years ago, but I think it outlines and speaks to your point. Marnie Waisman and Frank Giustra wanted to build the next Lionsgate. They were convinced that if you continued what they called “batting singles”—investing in your own IP, taking the cash flow from the production-service work, and investing it in your own children’s animated productions that you own the IP to—eventually, you’re going to strike gold.

They did it with Lionsgate. They transformed Lionsgate from a small Vancouver studio to a global player with that strategy. Then you have Voss Capital, which is like, “I want to do financial engineering.”

It’s a similar situation, actually, to Dan Loeb. Maybe 5 or 6 years ago, he was launching an activist fight against Sony and talking about how there needed to be less investment in owned IP in Sony films and on their creative side. George Clooney actually wrote a letter saying, “No, they have to continue creating.”

It’s a debate. 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—

No, but my point is that, yes, for an actor who gets paid and does projects and stuff, it’s very easy to say, “They really need to create.” I’m very familiar with these studios, especially post-COVID, but even before, and I think the debate was: Yes, they are creating, but it seems like all the returns from creating are really going to the actors and directors. I don’t know how much of it is actually—

Of course. I’m sure George has way less skin in the game than Dan Loeb. I’m not trying to imply that they’re equals, but I just wanted to use that to illustrate the point that 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 option the rights to The Last Kids on Earth for less than $10,000. So I think they can meaningfully invest in IP while buying back more of their stock.

6. The Uplisting Catalyst

This gets to the major point. I feel like we’ve been talking about all kinds of things on this episode, and we didn’t even get to this point, which is the major catalyst: By the end of this year, they are uplisting to the TSX exchange—the Toronto Stock Exchange, not the TSX Venture Exchange, which is the junior exchange in Canada.

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 so illiquid. Like I said at the start of the episode, $75,000 of stock was traded yesterday. So really, no institutional player can own this anymore.

There are rules on the Toronto exchange regarding how much stock 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 or do share buybacks on.

I think just being on that exchange, having more visibility, and having a larger set of mandatory buybacks is going to increase liquidity significantly. We would see this thing at least rerate to 3 to 4 times, which would be a great outcome for anyone coming into the stock right now. I think that would be a major catalyst.

There’s also a theme. I consider the CEO to be fantastic. I think Jennifer Twiner McCarron is a great CEO. I think she’s very mindful; she doesn’t want to just do the quick thing to get a rerating.

They were looking at doing a Nasdaq uplisting in 2021 or 2022. They shelved that idea because they thought it could flop—that the IPO would be unsuccessful on Nasdaq—which I thought was an unfounded fear. They also had $1 million to $2 million in capital-markets fees, which was very sizable for a company of their size.

I think they’ve been very cautious and geared toward investing in the business versus doing very tangible corporate actions that would rerate the stock. But I think you’re starting to see a change.

I haven’t been able to talk to Voss Capital for various reasons, but I know that they’re still pressuring them. I know that this move to do an uplisting was probably prompted by them.

I think the more time management can’t execute and strike gold—like strike the next Peppa Pig—the less credibility they have, and the more likely they’re going to succumb to investor pressures to do the buybacks and take actions that will raise the stock. That’s the truth of the matter.

I think when you ask, “Why am I in this?” I’m in this because it’s trading at 1.6 times EBITDA, which is outrageous for a business of this quality.

Look, I mean, that’s the thing. As I’m asking these questions, I feel like I should have led every question off with, “But it’s trading at 1.6 times EBITDA, and they get all the tax credits you talked about, and it’s asset-light.”

There is amortization in there, but I don’t think it’s a stretch to say this is a 4-times after-tax free-cash-flow kind of multiple. All the questions I have, I feel like the answer should just be, “But it’s trading at 4 times free cash flow,” right?

So that’s the crux of it. It’s a tough thing with these really small microcaps. Look, I’ve got a hard stop, I think, so is there 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 don’t think it’s been publicly discussed enough—is that they had a failed process. I think people on the buy side, in these circles, who increasingly are not buyers of the stock due to liquidity constraints know that they had a failed process.

I think the average retail investor is not aware of those dynamics because the only outside communication was that they did a strategic review in 2023, which determined that it was in their best interest to remain a standalone public company.

But I think what you’re going to see is that the liquidity, which has been a big issue for the stock, is going to meaningfully improve when they uplist in a few months to the Toronto exchange. That alone could drive a rerating.

The last thing, which I think I didn’t talk about enough, and I want to end with this note, is that I do think we’re reaching a reacceleration of the content wars.

If you look at the history of the streaming wars, at first it was full intensity—the time of peak TV, from 2020 to 2022. Then you had this era in which profitability was paramount. Then you had what’s called the frenemy era, which is when they were bundling—the bundling economy started happening—and you saw HBO Max partnering with Disney to put Hulu, Disney+, and Max under 1 bundle.

People look at that new rise in bundling and say, “Hey, I think the streaming wars are over. There’s going to be a consistent reining back of content spending.” I really don’t think that’s the case, to be honest.

They’ve done consumer surveys that show that the average American household has 4 streaming subscriptions, and that—I don’t know the percentage, but more than 50% of those households—want to rationalize their spending and cut back on their subscriptions.

You also have data that shows that only 1 in 5 streaming subscription services among the average household was purchased through an indirect channel—in other words, a bundle, like Verizon +play or the previous bundle I mentioned, the Disney-HBO one.

I have this view, which I didn’t talk a lot about, and it’s controversial. I’m sure people will disagree with it, but I think there’s going to be a real acceleration in content spend because content is really what differentiates these platforms for the end consumer.

Okay, cool. It’s a view. Anyway, look, this has been great. Thunderbird Entertainment, Franco from Sofon Capital Research, thanks so much for coming on, and we’ll talk soon.

Thank you.