The past year has truly been a roller-coaster ride for World Wrestling Entertainment (NYSE: WWE ) . The stock doubled just from the beginning of 2014 through the end of March, reflecting high hopes that its new subscription service would take off and a new TV licensing agreement would significantly boost revenue.
Unfortunately, all the optimism came crashing back down to earth when WWE revealed that its television content agreement with Comcast's (NASDAQ: CMCSA ) NBC subsidiary is far less lucrative than analysts had expected. This now calls into question the timing by which WWE will become profitable.
The market responded by slashing WWE shares nearly in half. Indeed, it appears that WWE management's projections now look overly ambitious and require a leap of faith to believe. However, all is not lost. If the company can somehow hit its subscriber expectations, there may be a great deal of value left in WWE.
WWE gets body-slammed
First, the details of the deal. WWE has signed a multi-year TV licensing agreement with NBC parent Comcast. The company estimates that annual revenue from its TV broadcasts in the United States, the United Kingdom, Thailand, and India will hit roughly $200 million. The broadcasts will involve WWE's two flagship programs and ratings leaders, Raw and SmackDown.
The reason for such overwhelming disappointment and the ensuing collapse in WWE's stock price is that the deal is far less beneficial than initially anticipated. WWE had hoped that the new licensing agreement with Comcast would represent at least a doubling, and possibly tripling, in revenue from its current TV content deal. That didn't happen.
Nevertheless, it's important to note WWE's progress in its key content agreements, which comprise a sizable portion of revenue. As the company laid out for investors, the new deals may be disappointing in the sense that they aren't as lucrative as initially hoped. That being said, they still represent growth from its prior content agreements.
To illustrate, WWE's past television distribution agreements generated about $76 million in annual value. That total increased to $108 million when it signed its current deals . Going forward, the new TV licensing agreement with Comcast holds an estimated value of approximately $200 million, which represents an 85% increase.
With the TV deal done, WWE's future rests on the shoulders of the WWE Network, its new 24/7 live streaming network, which costs $9.99 per month with a six-month commitment. To put it simply, it's all about subscribers.
Why WWE may have life left
After such a punishing sell-off, it may be tempting to write off WWE entirely. But that may be premature, and here's why.
WWE would need to get to 1 million network subscribers to break even. After the first quarter ended on March 31, WWE had already acquired 670,000 WWE Network subscribers just in the U.S. Based on this, management is confident it can reach $1 million by year-end.
If it adds more than 1 million subscribers, you can really justify a bullish outlook. If it hits 2 million subscribers, WWE could generate as much as $70 million in profit next year, or $0.93 per share. That means after its sell-off, WWE trades for 12 times those forward earnings.
If WWE can hit 2.5 million subscribers, the high end of its forecast, 2015 profits could reach as much as $105 million, or $1.40 per share. At the top end of its guidance, WWE would trade for just 8 times 2015 earnings. These multiples compare very favorably to the S&P 500 index's multiple of 14 times 2015 profits.
WWE down, but not out
To be sure, WWE isn't without its fair share of risk. It's entirely possible that the company won't hit its subscriber projections. But investors are being paid a hefty 4% dividend in the meantime.
And it's worth noting that after signing the TV licensing agreement with Comcast, WWE management stated that it anticipates having sufficient financial resources to fund growth and maintain its current dividend.
Whether WWE can meet management's profit expectations relies heavily on subscriber growth for its WWE Network. The company lays out a wide range of possible outcomes, depending on how many subscribers it racks up.
Clearly, the market wasn't willing to take that leap of faith, which explains the stock's massive collapse. But for investors who aren't afraid to take a risk, shares now look fairly cheap and could represent a compelling value opportunity if WWE is able to come close, or possibly exceed, subscriber estimates.
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