World Wrestling Entertainment Crashes: Buying Opportunity or Time to Run?

Source: World Wrestling Entertainment.

Shares of World Wrestling Entertainment (NYSE: WWE  ) were slammed to the ground on Friday, falling by 43.45% as investors reacted with pessimism to news that the company has signed a new licensing deal with NBCUniversal that was below expectations. Is the dip in World Wrestling Entertainment a buying opportunity, or should investors sell the stock before things continue getting worse?

Against the ropes
World Wrestling Entertainment has reached a new licensing agreement for its two main programs, Raw on USA Network and SmackDown on SyFy. The financial terms of the new agreement weren't officially disclosed, but the company estimates it will be increasing the annual value of its worldwide television agreements by $92 million to $200 million. According to a press release:

Over the past six months, the company has negotiated television distribution agreements in the U.S., U.K., and Thailand, and is in the midst of discussions regarding the distribution of WWE content in India. The company estimates that it will increase the average annual value of these key television agreements to approximately $200 million, representing an increase of more than $90 million that is nearly three times the increase achieved in the previous round of negotiations.

The release had a clearly optimistic tone, and the company also provided a chart showing how the value of its content agreements has been materially rising over time:

Source: World Wrestling Entertainment.

This is a considerable increase in revenues and presumably also in profitability, since costs will most likely be relatively stable in comparison with revenues. 

However, it all comes down to the announcement versus expectations, and many investors were clearly expecting much more from the company. Other sport franchises have obtained big increases in licensing deals lately, and this may have fueled overly optimistic expectations regarding WWE.

Major League Soccer recently signed a new eight-year deal with ESPN, Fox Sports, and Univision for $90 million, more than four times the expiring deal. NASCAR, which has similar ratings to those of WWE, last year signed a new 10-year deal with NBC and Fox for $820 million a year, versus $560 million in the previous licensing deal. 

The big decline in World Wrestling Entertainment on Friday is clearly an indication that investors were disappointed by the new licensing deal, but that doesn't mean the business is deteriorating at all. From a financial point of view, though, things are quite uncertain.

Risk and opportunity
WWE co-founder and CEO Vince McMahon has made a series of aggressive maneuvers lately. The company has launched its online subscription video service called WWE Network, which provides access to new programs and a huge library of content for $9.99 a month. This also includes pay-per-view content such as the remarkably popular WrestleMania.

To compensate for the loss in pay-per-view and subscription video-on-demand because of cannibalization, management estimates that WWE Network would require between 1.3 million and 1.4 million subscribers. The company announced in April that it had 667,287 WWE Network subscribers, and management is confident of reaching 1 million subscribers by the end of 2014.

It's important to notice that the company would still be losing money if it reaches that goal by the end of the year. WWE estimates it will lose between $35 million and $45 million at the level of operating income before depreciation and amortization, or OIBDA, during 2014, and net loss for the year is expected to be between $45 million and $52 million.

Under a considerably ambitious forecast for 2015, management believes WWE can turn to profitability next year. If WWE achieves an average of 2 million to 2.5 million subscribers for 2015, OIBDA is expected to range from $125 million to $200 million, and 2015 net income is expected to be between $57 million and $105 million.

The company pays a quarterly dividend of $0.12 per share, which translates to a dividend yield of 4.3% at current levels. The sustainability of these payments will ultimately depend on the company's ability to generate positive cash flows over the next few years, but the dividend yield still shows that the entry price may be attractive if the company can consistently increase sales and profits in the medium term.

Foolish takeaway
World Wrestling Entertainment is a risky investment. Future returns will depend to a good degree on variables such as the company's ability to grow its WWE Network business, which means considerable uncertainty. On the other hand, even if it's below expectations, the new licensing agreement is much more lucrative than the previous one, and this is a strong positive indication when it comes to evaluating customer demand and long-term growth opportunities. WWE may be painfully down, but the fight isn't over yet.

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Read/Post Comments (4) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 19, 2014, at 4:08 PM, MrBailey wrote:

    Don't count Vince McMahon out. He has continued to succeed over the years. He has recovered from every flop he created (think bodybuilding and football) and comes back stronger. As long as people like to watch wrestling on TV, WWE will survive. Buy now and it will bounce back long term.

  • Report this Comment On May 19, 2014, at 4:21 PM, mobrocket wrote:

    Its not a risky investment. WWE stock value doesnt change much and remains fairly stable

    WWE viewership has peaks and valleys but still does well

  • Report this Comment On May 19, 2014, at 10:27 PM, ladyjan wrote:

    There is nothing new, they are trying to bring back Revolution. Who want to see them. They are trying to up grade but they are not listening to the universe what they want. Like the punishment they gave Bryan and now he had neck surgery. I know it is all stage but no man should have gone through everything he did, and did it raised the rating, I don't think so. And they are not living up to what they promise to wrestlers.

    So no wonder they are loosing money. The fans pay for the wrestlers, they bring in the revenue, with out the universe WWE there will be no network

  • Report this Comment On May 20, 2014, at 3:30 AM, TGSKnight wrote:

    Being completely fair, people mention how the WWE stock crashed, but they don't mention the bubble WWE's stock was in in the first place. The stock was at $30 at its peak, and plummeted...back to the $10-11 amount it was at before this bubble started.

    The stock was woefully overvalued due to a number of problems besides the Network and TV deal- even if WWE hit their goals, it's a $200 million dollar deal (they missed by around $40 million)- and nothing short of an NFL-level TV deal would have kept the stock at $30. In addition, a wild card was in the works- a completely falsified rumor came out that WWE was in the process of being taken over by AMC Networks, and the TV deal with NBC-U made it clear that was a lie.

    It was a bubble, it burst, WWE is back to normal- but the SKY IS NOT FALLING for World Wrestling Entertainment, it's merely back to where it was three months ago.

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