WWE Offers Hard-Hitting Returns With Or Without a Buyout

As "meme stocks" like AMC Entertainment and GameStop galvanize the Internet, some online investors are buying World Wrestling Entertainment (WWE +0.00%) shares as if it belongs in the same basket. Unlike many of the other stocks with passionate online fanbases, WWE has a solid business model that should thrive over the long term. Some investors on the online message board Reddit are buying shares because they believe that another company could buy out WWE. But while that might be a possibility, the sports-entertainment company seems to offer investors hard-hitting returns even without a buyout.

Setting up a spectacular finisher?

With increasing fervor, users on Yahoo! Finance and other investing sites are circulating rumors that WWE could soon be sold.  Wrestling news site Ringside News reports that the company has been eliminating redundancies in the executive suite by laying off several vice presidents. WWE sacrificed those executives and other employees outside the ring at the altar of budget cuts. 

Image source: Getty Images.

In-ring talent hasn't been immune, either. In early June, WWE announced that it fired several wrestlers, notably Braun Strowman -- a former world champion connected to popular merchandise sales -- and Alastair Black, whom the company had just been giving increased airtime with a new storyline. . In response to these unexpected exits, former WWE writer Dave Schilling reacted by tweeting, "Ummm I think WWE is for sale."

Whether the company will be sold or not, these cost-cutting moves are improving the company's results. In the most recent quarter, WWE posted operating income of $65.1 million, a 22% increase year over year. In part, income increased because the mentioned employee lay-offs shrank salary expenses. In addition, WWE cut its first-quarter selling, general, and administrative expenses (SG&A) -- a measure of corporate efficiency -- by more than 11% year over year. Investors might interpret WWE's shrinking expenses and rising profits as an effort to make itself more attractive for a potential buyer.

The Last Ride?

WWE CEO Vincent McMahon has been in control of the company since 1982, and after 39  years, he may want to retire and enjoy the windfall that would come from a sale. McMahon owns about 37.6% of WWE Class A public shares , but he also controls an estimated 80.6% of the non-public Class B shares. These Class B shares give holders 10 times the voting rights of Class A shares. In short, McMahon holds the keys to any deal for the company.

Second, since WWE hired President Nick Kahn in August 2020, the company has released 60 internal employees and 16 main-roster superstars. It's possible that WWE was carrying too many employees. However, this whittled-down workforce could be another sign that WWE is trying to make itself look more attractive to potential buyers.

Third, WWE's move to make WWE Network a part of the Peacock streaming service suggests the wrestling powerhouse realized it couldn't compete on its own.

Peacock is owned by Comcast Corporation (CMCSA +0.00%) and WWE Network isn't the only wrestling asset that Comcast is paying for. NBCUniversal also pays WWE about $670 million annually  for the rights to Monday Night RAW and NXT on USA Network. Wrestling Edge reports the next RAW and NXT deals could cost a combined $760 million annually or more. The last time RAW and Friday Night Smackdown were renewed in 2019, their combined annual revenue skyrocketed from $150 million per year to $470 million per year.

Speaking of Smackdown, the show is under contract with Fox Corporation (FOX 0.86%) through 2024. However, Comcast's Hulu deal with The Walt Disney Company (DIS 0.14%) could serve as a template for how this issue could be resolved. Comcast agreed to sell the percentage of Hulu that it owns to Disney at a future date. In exchange, the deal allowed Disney to take full creative control of Hulu in the meantime.

Looking at a price-to-sales comparison to see how WWE is valued gives us insight into what a reasonable buyout might look like. Though WWE seems a bit pricey at current levels, the impending renewal of two of its biggest programs in the next few years is a big bargaining chip that suggests WWE could command a premium.

(Data source: Comcast , Disney , ViacomCBS , WWE .)

Given that Comcast is already paying $670 million per year for RAW and NXT, plus an undisclosed amount for WWE Network, it makes sense for the cable conglomerate to make an offer for WWE. An offer of $6 billion would represent a 20% premium to the current valuation and would provide Vincent McMahon the ability to cash out at a nice premium. In addition, this would allow Comcast to control its costs related to future WWE commitments -- and capture WWE's future cash flow as well.

WWE Forever?

WWE's tag line is, "WWE, Then, Now, Forever." Given this theme, what if McMahon decides he doesn't want to give up control? The short answer: Investors should be happy with or without a buyout.

Recent layoffs notwithstanding, the WWE bench seems deep -- a good sign, given strong talent and dynamic storylines' crucial role in the company' success. The NXT brand offers a sort of minor-league system to the two main shows. Former world champions (like Finn Balor) that moved to NXT, could easily be moved back to the main roster. WWE should also benefit from the return of former Women's Champion and megastar Becky Lynch from maternity leave. Lynch was one of the biggest draws for the company prior to her exit roughly a year ago.

As proof that WWE's plans are working, we only need to look at the sports-entertainment company's revenue trajectory.

(Data source: WWE . *Yahoo Finance)

WWE's main source of revenue are its media rights. Beginning in 2019, WWE's RAW and Smackdown deals represented a significant jump in revenue as we saw. Moving WWE Network to Peacock, and renegotiating the NXT deal, have provided additional revenue increases. The fact that WWE is getting back to touring and promoting live shows should continue to drive revenue growth. Aside from projected top-line growth, analysts also expect nearly 16% EPS growth over the next five years from WWE. Given what we've seen from WWE's network deals in the past, this growth rate could be conservative.

Investors should be able to track whether WWE will be sold as -- any deal, if it happens, will get plenty of publicity. The wrestling powerhouse is getting back to live touring, and its deep roster should keep fans entertained for years. As the big television renewals for RAW and Smackdown approach, investors can keep tabs on the potentially lucrative deals as well.

As we saw from the price-to-sales comparison above, WWE looks a bit pricey at present. Investors should consider dollar-cost averaging into the shares. This approach would give investors some exposure to the shares in case a buyout occurred sooner rather than later. However, acquiring shares over time would also give shareholders the ability to take advantage of any corrections that might occur. With or without a buyout, WWE seems like a growth story that could serve up hard-hitting returns.