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2 Big Questions World Wrestling Entertainment Must Answer

When a stock drops more than 60%, investors have a right to ask questions about the future of the company. This leads us to World Wrestling Entertainment (NYSE: WWE  )  where shareholders have adopted a sell first, ask questions later approach. Beyond disappointment over the company's recently renewed television agreements, there are two specific questions WWE needs to answer today in order to gain back investors' trust. 

You need to watch to invest
Yes I'm actually suggesting watching WWE's shows as a form of investment research. In fact, any investor who thinks they can intelligently invest in WWE and ignore the product the company is producing, is foolish (with a lower case f).

Not watching wrestling and trying to gauge WWE's future success, is akin to not knowing anything about HBO's popularity and trying to intelligently invest in Time Warner (NYSE: TWX  ) . Knowing that House of Cards just premiered a new season, or that Orange is the New Black's next season is due soon, are critical points to the investing thesis for Netflix (NASDAQ: NFLX  ) .

What happened to that guy?
WWE is a business predicated on character development. Like it or not, the company lives and dies with the popularity of its performers. The more popular the roster, the better the company's sales. This is why the first big question WWE needs to answer is, what happened to that guy?

In the last few years, WWE has spent a lot of money and air time pumping up the debut of one star or the other. Future stars like Ryback, Fandango, Damien Sandow, Zack Ryder, Tensai, Sin Cara, are just a small list of performers that started with high expectations, and today are little more than filler for WWE's weekly programming.

This type of relative failure rate is disconcerting because some of the main event stars haven't changed in years. John Cena and Randy Orton are still a primary focus of nearly every pay-per-view. This is a key difference between WWE's future (the WWE Network) and Netflix or HBO.

Netflix generated about $50 million in core free cash flow in the last three months . While originals get the headlines, Netflix still spends the majority of its cash flow on reruns of programming that someone else produced.

Time Warner's HBO business is a big part of why investors buy the stock. With over $1.4 billion in free cash flow,  investors don't question if the company can afford to continue producing its own series.

In the last four quarters, WWE produced just over $18 million in total core free cash flow . The bad news is, the company has paid out over $36 million in dividends in the same timeframe. Part of the issue is, viewers aren't interested in seeing the same stars in similar matches year after year. The company needs to do a better job of weeding out the wheat from the chaff before overspending to promote performers who don't excite viewers.

$9.99 what a value!...It is a good value right?
The second big question facing WWE today is, what is the potential value of the WWE Network? WWE's hopes for the network were laid out in a recent press release.

(Source: WWE News Release May 5, 2014) 

WWE says to break-even on pay-per-view losses the Network must run about 1.3 million subscribers. At 2.5 million subscribers or more, the company could double or triple its profits from the pay-per-view business.

This sounds great, but the economics may not work. There are millions paying for their cable package. If they already have Netflix at $7.99 (or $8.99 per month for new subscribers), as well as millions paying between $15 and $20 a month for HBO , another $9.99 may be too much.

WWE Network is a great value if customers would have otherwise paid for multiple pay-per-views. At around $40 per pay-per-view, a $120 annual cost for WWE Network pays for itself with just three pay-per-view buys.

However, WWE sells WrestleMania to around a million viewers, but lesser events get buys of less than 300,000 in many cases. It may be difficult for customers to justify paying $120 a year for a service that maybe only saves them from buying one or two events.

WWE better get this right
The problem with WWE's current business model is that analysts believed the company's television deals could renew at four to six times what the company was getting. It's possible that the company's projections for the Network's growth could go the same route. WWE is betting the future of the company on streaming video. If WWE over promises and under delivers, the 60% body slam in recent weeks could be just the start of pain for shareholders.

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Comments from our Foolish Readers

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  • Report this Comment On May 29, 2014, at 2:21 PM, KennyBania wrote:

    When was Fandango, Damien Sandow, Zack Ryder, Tensai, Sin Cara ever PUSHED??? Zack Ryder??? seriously? He's on par for being wwe's biggest JOBBER since Barry Horowitz. As far as Ryback goes, he WAS pushed but he kept hurting people (legit) and people got tired of his s..t

  • Report this Comment On May 30, 2014, at 11:09 PM, Droppo wrote:

    That business is very cyclical and dependent on a combination of luck and planning. Even if it's in a dip right now, people come and go and the business moves on. There was the Hogan era that gave way to the attitude era which gave way to this currently waning John Cena era... Another group will rise, but they don't know who it will be. It isn't always who they expect. The stock prices will become more stable and start to rise again. The investors were just butt hurt that they didn't get the six times value on the new TV contracts. All they got was a 50 percent increase. Hear that? An INCREASE. So it should have at least just stayed about the same, not FALLEN in value. That was just a knee jerk reaction that won't last forever. I hope writers enjoy jumping on this story every few hours while they can. In a month or two, it won't seem nearly so low for WWE.

  • Report this Comment On May 31, 2014, at 12:45 PM, JAXGoBlue wrote:

    "When was Fandango, Damien Sandow, Zack Ryder, Tensai, Sin Cara ever PUSHED???"

    Damien Sandow won the Money In the Bank match a few years ago, which typically signals a push before they cash it in and win the World title. Instead, they just had him job, job, job and then JOB when he went to cash it in.

    Fandango seemed poised for some type of push after WrestleMania 29 in which the fans at Raw spent all night Fandangoing and singing his theme song. But instead of letting something that was totally random and fun grow on its own, the WWE spent weeks trying to cram it down fans throats and it lost its "cool" factor incredibly fast and they've done nothing with his character since.

    Dolph Ziggler started to become another fan favorite, had the title put on him a few times (fans popped big when he cashed in his Money In the Bank opportunity). Held the title a few months and now he might as well be part of the JOB Squad.

    WWE has a history over the past decade of starting to push guys or having wrestlers who are clearly over the fans and then squashing them for no apparent reason and killing any heat they had. Heck, they even tried this with their current champ Daniel Bryan last year when he carried the promotion all summer, got his shot at Summer Slam for the title (which seemed like an obvious move to have him win) and then spent the next three months screw jobbing him out of the title so he never won it, then DE-PUSHING him down the card. Why would you take the hottest guy in the company and do that? As a fan it made no sense, and as an invest it made no "cents."

    Despite their attempts (for whatever reasons), fans STRONGLY remained by Bryan's side and it got to the point where they hijacked shows chanting his name and doing his "YES!" chant (see the Royal Rumble and Batista's HUGE flop of a return with fans booing him). This went on until they had no choice but to put him in the WrestleMania main event and have him win. If WWE ever tries to say that was their plan all along, that'd be the biggest bunch of BS.

    A lot of the creative decisions they have made over the past decade have been mind boggling.

    Also keep in mind during The Monday Night Wars with WCW, the WWE was pulling in 6.0 ratings for Raw on Monday nights while WCW was still pulling in the 4.0 to 5.0 range. Today, with NO competition, the WWE is pulling in the high 2's and low 3's if they're lucky. That is a MASSIVE loss of the overall audience.

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Chad Henage

Chad is a self professed tech nerd and has been investing for over 20 years. He follows nearly everything in the technology and consumer goods sectors, and is a huge fan of the Peter Lynch investing style. He has over 1,000 published articles about stocks and investing. You can follow Chad on Twitter at @chadscards1274.

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