Does WWE Sell-Off Give Investors a Reasonable Entry Point?

World Wrestling Entertainment (NYSE: WWE  ) got the smackdown during Monday's trading, dropping nearly 15% over the course of the day. In the past month, the stock is down nearly 20%. It's not that the company is doing poorly. The premium cable network WWE has passed the 600,000-subscriber mark and is well on its way to hitting 1 million -- and it's not even two months old. The reason for the drop is because the market, in typical fashion, awarded WWE a sky-high valuation. The question now is: Does the recent drop make the stock a buy?

Pinned down
The WWE didn't report any poor financials in the last month, but it did tell investors and analysts the early results from the launch of its streaming network. For a network that has been available for less than 50 days, a 660,000-strong paying audience isn't much to scoff at, especially considering the limited scope of the programming (24-hour wrestling content). Still, this is a business that has traded at absurd valuations for months on end.

As of April 4, WWE had booked a six-month move of nearly 160% in capital appreciation. North of $30 per share, the company was trading at a trailing P/E of more than 700 times. That number doesn't quite tell the story of the business, as WWE incurred big expenses leading up to the launch of its network. In 2012, the company earned $0.42 per share, implying a still-absurd 70-plus times trailing two-year earnings. For the full-year 2015, analysts expect on average $1.16 per share, giving the company a two-year forward P/E of 26 times -- until today's drop.

Wrestling is certainly a perennial cash-cow business, driven by the big-time pay-per-view fees with gorgeous margins -- but does it justify these ambitious valuations?

Good and evil
On an operating level, investors should be pretty excited at the immediate results from the WWE Network. Management notes that 1 million subscribers, which the company shouldn't have too much trouble hitting soon, is a breakeven point for the venture. At 2 million subscribers and up, the company uses the term "transformative" to describe the effect on the business.

WWE Network is only available in the U.S. and on limited platforms. If the company wants (and it should), it will unlock the floodgates and put the network on every platform imaginable. Two million or more users paying $9.99 per month is a reasonable possibility in the next few years.

After the major correction, WWE now trades at roughly 20 times forward earnings (using $1.16 per share). The number isn't quite low enough to ignite the interest of price-conscious investors, but growth hunters should take notice. The wrestling crowd is a loyal one, and this new network has the potential to capture them all.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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