How World Wrestling Entertainment, Inc. Is in the Middle of a Perfect Storm

World Wrestling Entertainment (NYSE: WWE  ) (NYSE: WWE  ) (NYSE: WWE  ) shareholders have spent most of the past few weeks in shock after witnessing the stock take a swan dive from all-time highs of about $32 in March to below $11. On the surface, the company appears as successful as ever, so why did this disaster happen?

It turns out that, despite the popularity of the company, WWE shareholders recently found themselves at the center of a perfect storm that developed around the stock. So what can you learn from this experience, and how does your experience compare to the experiences of Facebook (NASDAQ: FB  ) (NASDAQ: FB  ) shareholders after its disastrous IPO in 2012?

High expectations
As I have written before, high expectations are a shareholder's worst enemy. And yet many optimistic investors get caught up in the excitement of pending news, earnings rumors, or buyout hopes.

Their misguided intuition tells them that they know good news is coming, and if they simply buy stock before the news comes out, the share price will skyrocket once the news is official. In the case of WWE, the "big news" items were the launch of the WWE Network in February and the new television deal with NBC Universal announced on Friday.

If you take a look at a chart of WWE over the past few years, it's easy to see when expectations started to build in late 2013. 

 

The numbers
Certainly some of the blame for unrealistic expectations of the WWE Network and the new television deal rests squarely on the shoulders of the WWE itself. In December, Chief Strategy and Financial Officer George Barrios compared the company's upcoming TV deal to Nascar's $820 million annual TV deal with Fox and NBC. 

On Friday, WWE announced that its new deals to continue to air Raw on USA Network and Smackdown on Syfy would be in the neighborhood of $200 million, a far cry from Nascar's $820 million. 

Source: wwe.com.

As far as expectations for the WWE Network go, WWE has been actively promoting the network on Raw as "just like Netflix, but better!" 

With only about 667,000 confirmed subscribers to the fledgling WWE Network, comparisons to Netflix and its nearly 50 million subscriber base might not be the best way for WWE to temper high expectations. Although the WWE Network reached 667,000 subscribers in only 42 days, WWE itself projects that increasing the number of subscribers by 50% to 1 million by the end of 2014 would result in a net loss of $45 to $52 million for the company. 

Between unreasonably high expectations for the new TV deal and the WWE Network, shareholders lost their grip on reality during the past few months. If you look at the overall performance of the company, you can see the stock had no business ever being near $30. Take a look at a plot of WWE's EBITDA, revenue, and share price over the past five years.

As you can see, the 350% increase in WWE share price during 2013 and early 2014 was not accompanied by any meaningful change in revenue, and earnings actually decreased during that time to five-year lows.

Rookie mistake
So how is it that WWE stock got so overpriced? As I said, it's not uncommon for stocks to become overpriced because of overly optimistic shareholders, but a 66% drop in a few months is extreme. I believe that the nature of the WWE shareholder base played a role in the WWE "bubble."

Professional wrestling has a large, well-documented online cult following. Many of these wrestling super-fans keep abreast of behind-the-scenes wrestling news just as much as they follow the on-screen story lines. With the meteoric rise in WWE stock during the latter part of 2013, it comes as no surprise that WWE stock became a topic of much discussion among wrestling fans. I can only assume that many of these fans, whose stock market acumen is likely not as solid as their pro wrestling knowledge base, got sucked into the "irrational exuberance" of the WWE stock frenzy.

What can WWE learn from Facebook?
When I read comments on pro wrestling message boards by shareholders citing brand loyalty, lack of competition, and TV ratings as reasons for buying WWE stock, it reminds me of the types of things I was reading and hearing about Facebook prior to its infamous IPO.

Sure, high TV ratings are indirectly good for WWE and can be used to gauge the popularity of its programming. But when it comes to making money, the weekly Raw ratings have about as much to do with WWE's bottom line as the number of free Facebook subscribers had on Facebook's bottom line in 2012. Unless WWE can figure out a way to monetize its popularity, as Facebook has over the past several quarters, WWE stock will likely not get back to $30 per share anytime soon.

Your cable company may soon be pinned, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 


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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 23, 2014, at 2:16 PM, thegreyghost23 wrote:

    Institutions own 91% of the stock according to Google Finance (Nasdaq says 92%), so I am not sure individual owners could drive the stock to the $32 level solely.

    The stock was certainly overvalued at $32 as to where it sits in today's world as many companies are; including the one you sited Netflix, but the future of the company is what is reflected in share price a lot in the stock market.

    Where WWE will be in the next year or so will depend on their network, which I believe has only been rolled out in the United States. How many U.S.

    and foreign subscribers are they able to attract and keep.

    A lot of this will come down to content. They might be wise to look at showing different wrestling companies in foreign countries (ie. japan) where some of their stars have wrestled in the past and signing deals with some USA indy promotions, because I am not sure old footage is sustainable going forward.

  • Report this Comment On May 23, 2014, at 9:41 PM, ryanchandler25 wrote:

    You think hardcore wrestling fans have the capital to push the stock from $11 to $32?

    It was institutional investors that pushed the stock that high with grand visions of the over-the-top network. When they saw the network as not being the growth engine they initially believed it would be, they dumped the stock.

    I don't agree with your comment on finding a way to monetize the audience. They already do. The higher the rating, the higher the contact they can negotiate with the networks. That's why they were able to sign new contracts for 50% higher than the old ones.

  • Report this Comment On May 24, 2014, at 12:28 AM, scraig3376 wrote:

    A lot of things that attracted fans to invest in the company have been abandoned,

    Solid scripts that are family friendly no longer exist. Many of the story lines are old and stale or so perverse or near sac religious that the family values are void.

    I have to wonder with the termination of senior writers, and a more active role by Stephanie and Triple H, and the lack of on screen involvement by Mr. McMahon if the arrogance and the less then expected TV deal hasn't hurt them. I for one have not bought the internet package because of the recent brutality and paganism.

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