When Michael Lewis wrote Moneyball, he shined a light on how Oakland Athletics General Manager Billy Beane looked at the game of baseball differently than his rivals.
Beane tossed out some of the flashier statistics used to judge players -- home runs and batting average, for example -- in favor of less sexy ones like on-base percentage. This allowed him to identify undervalued players he could sign to his team with a limited budget. The strategy worked.
In this episode of Industry Focus: Consumer Goods, Vincent Shen and Daniel Kline take some of the lessons from Moneyball and apply them to the stock market. Specifically, they discuss two companies, SiriusXM (NASDAQ:SIRI) and World Wrestling Entertainment (NYSE:WWE), that show the same potential that a baseball player may have had to Billy Beane.
A full transcript follows the video.
This podcast was recorded on Aug. 2 2016.
Vincent Shen: I had mentioned Michael Lewis for the second part of the show. In particular, we're going to talk a little bit about Moneyball. At least, not specifically the book itself, but that take in terms of how to look at stocks. Why don't you kick that off, Dan?
Dan Kline: The premise of Moneyball, which is a tactic used by the GM of the Oakland Athletics at the time, was, baseball players tend to be valued based on their flashy statistics -- home runs, batting average -- when the reality is, the values to be had in baseball are based on less-known statistics, base percentage being one of them. So you might have a very productive player who doesn't hit for power, who doesn't put up the flashy numbers, but he actually has a greater impact on the game. If you start looking at players based on value, you might be able to bring in guys for $1 million versus $20 million, and the difference in production is maybe 10%, whereas the difference in money is astronomical. That's the premise of Moneyball.
When you apply that to stocks, you can look at some of your more popular stocks, your Apple, your Microsoft, Comcast, companies that get a lot of hype, that get a lot of media attention, and maybe they're overpriced because of it. Then, really look at companies that have the on-base percentages, have the fundamentals that make them a good buy, even though they might not be as hyped.
Shen: With that analogy in mind, I know you mentioned two tickers to me that you wanted to talk about. The first one, which, I actually really thought this was a good example in terms of not getting as much of the headlines, but it's definitely shown a lot of progress and growth in recent years. I think their business model is putting them in a really interesting position. That's SiriusXM.
Kline: SiriusXM is using the same model as Netflix, but they have less competition. In the old days, they were spending $50 million on Oprah, and $100 million on Howard Stern. Those are rough numbers. And they were bidding up every piece of available content. Now, they've learned, aside from Stern, who has a lesser deal, that you don't need to pay a lot of money for content. You can put on some lesser-known shows, build them up, have your music programming, buy your sports right. But they're sort of competing for sports rights against no one when it comes to the national radio audience. And you're making subscriber revenue. And it's such a low subscription number, less than $20, less than $15 in some cases, that it becomes like Netflix. It's something you don't cancel, even if you're not using it that well. Plus, they have the added advantage of, it's installed in most cars now. When you buy a new car, you get a free trial of it, so a lot of their marketing cost has gone away. So you have a company that's just minting, I don't know the exact number, 23 million is the subscriber ball park. That's maybe half Netflix in the U.S., but it doesn't have the billions of dollars of cost Netflix has, and Netflix is competing with every broadcast network, every streaming network. SiriusXM is competing with, if you have a good internet connection, or good phone data, and you want to listen to podcasts in your car.
Shen: Absolutely. The thing there is, what you mentioned, in terms of Netflix's competition with other content providers, really deep pockets. SiriusXM doesn't necessarily face those kinds of challenges. I actually wanted to jump in to say, I think their most recent subscriber numbers came in over 30 million, actually. Quite a bit higher.
Kline: Oh, sorry, I was a little out of date on that.
Shen: That's, again, more support for the idea that they have this base, they have really solid, consistent free cash flow generation off of that. I think their churn rates have come in recently at really low levels for the company. Churn rates, for listeners who aren't sure what that is, is people who are rolling off the service.
Kline: It's a base which hasn't shrunk as programming has left. Oprah went away, Martha Stewart went away, Cosmopolitan radio went away. Lots of things that were big-money deals expired, and you didn't see big hits. I think they'll take a big hit when Howard Stern leaves or retires. But maybe they lose five to 10%, if he doesn't go anywhere else, maybe they don't. It's a really solid business. You talked about the streaming services. When Seinfeld came up for bid for streaming, you had Hulu and Amazon and Netflix all bidding it up, and it went for, I believe, $1 million per episode. In radio, you simply don't have those costs. Local radio, there's very few national personalities and people who are getting a lot of money. It's really a free course for SiriusXM.
Shen: Yeah. Touching on the last one here, it's kind of similar, the way you described it to me -- I was not as familiar with that, but I did use to be a wrestling fan.
Kline: World Wrestling Entertainment, it's a very similar business model. Obviously they have other revenue streams. They have live events, they have their TV contracts, but the most promising number they have is the WWE Network, which is in 1.4 to 1.5 million homes. It changes every few weeks. But it's been steadily growing number. That's a hardcore dedicated audience that's paying $9.99 for the programming. As that technology rolls out around the world, it's reasonable to think they're going to build to three, maybe four million, on top of all the other revenue streams. You're getting a very fixed-cost programming. There's no major other wrestling organizations that they're competing with for talent. So they have a very strong ability to control cost, and they have an endless amount of archival programming. You get that Netflix model, but once again, holding the programming cost down with the recurring subscriptions. It's going to take time to build. It hasn't grown as fast as they would have expected. But wrestling has been a resilient business in the U.S. for something like 90 years, there's no reason to think that's going to change any time soon.
Shen: The company launched this streaming service in February of 2014. It's only been a little over two years. As Dan mentioned, it's expanded all over the world at this point. $9.99 a month. It's shaken up their previous model, when they used to do a lot of pay-per-view events. Now, it's giving them a bit more stability.
Kline: Right. Pay-per-view, which used to cost $39 to $59, maybe a little bit more if you wanted it in HD, would depend on having the right programming. If they had the right match up, maybe they would do 1.2 million and make a lot of money. But if they had the wrong match up, they might do 180,000, or even less than that when it comes to buys. Now, as a fan, for the price of one pay-per-view every six months, you get all 16 pay-per-views, plus all this other programming. But most of the programming they're doing, aside from the live shows and the pay-per-views, is very low-cost, in studio talking heads, or old clips strung together, the 50 greatest tag teams from 1980 or whatever it is. It's all very inexpensive archival programming. It also can bring back lapsed fans, as their kids get old enough to want to watch wrestling. The guy who grew up a Hulk Hogan fan might say, "Yeah, I'll spend $10 for this for my kid." And once again, it becomes something you just don't cancel. I'm a WWE Network subscriber, and I remember to watch it maybe once every four months.
Shen: There you go. WWE Network and SiriusXM, at least in the time we have to talk about, are our two with this Moneyball approach -- maybe not taking all the headlines on the Wall Street Journal, for example, but they have that base of subscribers or users that has given them a pretty solid business model.
Kline: Yeah. In baseball terms, putting it back to Moneyball, they're a hitter who hits .280 who can play five positions who walks a lot. Maybe they don't put up a lot of home runs, but if you look at the impact on the game, in the case of the two companies, their ability to return revenue to shareholders, it's much higher than you would think it would be.