Is WWE Getting A Raw Deal From The Stock Market? – World Wrestling Entertainment, Inc. (NYSE:WWE)

I don’t think World Wrestling Entertainment (WWE) is a stock the market takes seriously, much like the brand itself which occupies a niche in today’s society. I am not in agreement with the market.

I think I was 8 or 9 years old when I first stumbled upon an episode of Raw or Smackdown, as I was probably channel-surfing at the time. The show caught my attention immediately, with the great scripted matches and out-of-the-ring drama keeping me glued to the screen and exciting wrestling moves keeping me practicing at home (on my younger brothers). It was so convincing I thought everything was real, getting excited with the commentators and loving the whole new wrestling world I’d discovered.

This craze faded after a year or two, though whenever I’d sit down to watch TV and see WWE on, the old excitement would return. Watching sporadic episodes every few years continued until April 2015 when I saw some news about that year’s Wrestlemania event and decided to watch a highlight reel of the action from the day before. For those who don’t know, Wrestlemania is WWE’s ‘main event’, the culmination of a year’s worth of wrestling, drama and excitement. One highlight reel turned into a couple of hours watching online videos, catching up on years of wrestling I’d missed out on.

As I was already active as an investor at the time, my thoughts turned to whether WWE was a listed company. When I found out it was, I wanted to know more about its profitability and potential future growth. (Spoiler: I thought it was a good long term investment and bought at $16 a few days later)

Source: AZ Quotes

WWE: One-of-a-Kind Media Company

Being WWE’s greatest export, I thought Dwayne “The Rock” Johnson’s above quote personifies an investment in WWE. The origins of WWE were founded in 1952 by the grandfather of current Chairman and CEO Vince McMahon and through the tireless work of four generations of McMahons, professional wrestling joined the big-time. WWE’s primary business is professional wrestling, though it has recently been growing its entertainment segments with revenues from films, product licensing, merchandise sales and video games, all of which feed off the wrestling business.

WWE reports in two segments: the Media division; and the Consumer Products division. The Media division consists of revenue derived from TV contracts, the WWE network, home entertainment, digital media, and live events. The Consumer Products division includes revenue from licensing, merchandise sold at venues as well as the WWE Shop, and WWE Studios.

Using FY 2016 numbers, 63% of its $729 million in revenues came from the Media division (ex-Live Events), 20% came from Live Events and 15% from Consumer Products. The good news here is that the company has highlighted the WWE Network as well as traditional TV contracts as high growth areas, which together with their already large revenue will help WWE grow into the future. An added bonus to this is that WWE’s international sales, which already make up 26% of total revenues, is also slated to grow a high rates.

WWE’s management have transformed the company in recent years, focusing on launching and sustaining the WWE Network, which currently has 1.49 million paid subscribers and is expected to reach 1.63 million by the end of FY 2017. Attention has also been on international expansion, as I mentioned already, as well as on monetising WWE’s significant digital media ecosystem. The strategy seems to be working, with FY 2016 revenue growing more than 10%, adjusted OIBDA (operating income before depreciation and amortisation) growing 17% to $80 million and paid subscribers on the WWE Network growing 15%.

These numbers may not be ‘sexy’ a la Apple (AAPL) or Facebook (FB), but I believe consistent annual growth in the low- to mid-teens is achievable by this one-of-a-kind media company. And as “The Rock” stated, success will come with consistency and this can be WWE’s future if management keep growing the company in the right areas, as well as further monetising key assets.

Not only does WWE have a recognisable and powerful brand, it also owns thousands of hours of original content that it can monetise through the WWE Network, TV viewing and digital media. And it is these three pillars of media that make up the WWE media ecosystem, which management has stated they are focused on growing and monetising, much like Apple’s or Facebook’s ecosystems. In 2016, a record 6 billion hours of WWE media was watched over the three pillars.

There’s Room to Grow in TV and Digital Media

The traditional TV business is WWE’s largest and most profitable business currently, with revenues of more than $213 million expected in 2017. Seven of WWE’s major TV contracts run until the end of 2018, and I expect them to be renewed at even better terms for WWE as has been the case in recent renewals. And why shouldn’t WWE get paid more? NBCU has added fifty blue-chip advertisers in the WWE slot over the past two years, which shows WWE’s TV shows’ value proposition for the network. Not only this, but 4.3 billion of the 5.1 billion hours of WWE watched on TV last year was international consumption. This huge market opportunity to monetise the international TV market is already a focus of WWE’s management, as they look to India and China to build on the strong foundation the company has in the U.S.

WWE also has a very strong presence in the digital and social media environment, with more than 15 billion video views on YouTube and more than 1.1 billion social media engagements (likes, comments etc.). This area is very important in engaging and keeping the new generation of WWE fans in the WWE ecosystem and this focus has already started paying off with WWE being named a top 3 sports media property (according to a study by Tubular). Management is also trying to maximise monetisation of YouTube and other digital media views, with some videos transitioning to ‘ad supported’ status and thus garnering a high margin source of revenue for the future.

Source: WWE

The WWE Network is the company’s fastest growing segment, as well as being the second largest and second most profitable. The most important point though, is that the WWE Network is highly leverage-able. This means that as subscribers grow, more of the additional revenue falls straight to the bottom line as profit. This is due to the costs WWE have already invested in the business: building the network; compiling the different media; and other fixed costs. In 2016, the WWE Network was the 5th largest SVOD (subscription on demand) in the U.S. and had the 2nd highest Net Promoter Score (how likely subscribers were to recommend the network to others), only behind streaming behemoth Netflix (NFLX). This division is the one to watch, as a lot of WWE’s future growth will hopefully come from here as subscriber numbers grow into the future.

Now to the juicy bit: the key to subscriber growth is bringing the engagement in WWE’s digital media and TV businesses into the WWE ecosystem. Interesting storylines and wrestling match-ups seen on TV will attract viewers to the WWE Network, and so will digital media videos and interactions. And also importantly, digital and social media engagements will drive a younger viewership to the network, bringing (hopefully) longer lasting relationships between WWE and these new subscribers.

Going Forward

WWE is using its strengths to make sure it survives and thrives in the new media world. Using the strong WWE brand, it started its own direct-to-the-consumer WWE Network which has grown rapidly to just under 1.5 million subscribers and is expected to hit 1.63 million by the the 2nd quarter of 2017. Using its TV viewership and digital media engagement to drive subscriber growth on the WWE Network, especially the rapidly growing international market, management is bringing more consumers into the WWE ecosystem. This capitalises on the higher margins earned from subscribers to the network, as well as digital media views. The focus on higher margin businesses by management can be seen in the OIBDA growth for 2017, which is expected to increase 25% to $100 million.

Overall WWE, probably isn’t going to shoot the lights out in a short time period. However, over a long term investing timeframe, I believe WWE has what it takes to grow consistently and strengthen its brand in the future. And at approx. 15.5x OIBDA, WWE is not expensive at all given the growth it expects in the near future and the opportunities it has to expand its businesses.

Bonus?

Just a thought: about a year ago, UFC (Ultimate Fighting Championship) was sold to private equity for $4 billion (6.7x revenue). With UFC making about the same revenue as WWE ($600 million vs $659 million for WWE, in 2015), and WWE’s market cap of approx. $1.6 billion (2.2x revenue), it seems WWE might be undervalued by the market. Yes, UFC is a real competitive sport whereas WWE is scripted, and UFC has been growing at a faster rate than WWE since its inception. But is UFC really worth more than double WWE, which has been around for decades and is starting its new growth path? Just something to think about!

Thank you for your time and please comment if you have any suggestions for future articles or other thoughts! Please follow me at the top of the page if you’re interested in reading more articles about my portfolio, my watchlist, or my investing world, and to keep up to date with the companies I cover. I hope to continue outlining my portfolio and highlighting the stocks I hold in future articles to help the Seeking Alpha community in finding and researching investment-worthy companies.

Sources:

WWE First Quarter 2017 Results

WWE Investor Presentation May 2017

Forbes Article “UFC Vs. WWE: How Much More is Real Fighting Worth?”

Disclosure: I am/we are long WWE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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