Despite strong popularity, evidenced by its ownership of one of cable TV's longest running programs, World Wrestling Entertainment (NYSE:WWE) seems to struggle monetizing its rabid fan base. That being said, the company's shares have been on fire lately, due to high expectations for a new cable TV deal, which management expects will double or triple the company's profitability.
Mr. Market is also excited about the company's launch of the WWE Network, a subscription-based, video streaming service that is already well on its way to a million subscribers. So, is it time for investors to bet on this quasi-sports, entertainment powerhouse?
What's the value?
WWE has built a pretty diversified ecosystem for its wrestling entertainment over the past few decades, encompassing live events, cable TV programming, publications, and kids' toys. The company has found success across a wide swath of geographies, and offers its programming in roughly 150 countries that reach a potential audience of 650 million people. While WWE's offerings would seem mostly geared for a Western audience, the company is finding new fans in unlikely places, highlighted by the recent hosting of its first live event in conservative-minded Saudi Arabia.
Unfortunately, WWE has had difficulty translating its strong, global viewership base into higher profits, reporting a sharp drop in adjusted operating income in its last fiscal year. The company was plagued by higher costs for its core programming operations during the period, as well as being negatively affected by lower pay-per-view buys of its live events. The net result for WWE was weak cash flow generation, hurting its ability to invest in its next-generation capabilities, like its fledgling network.
Of course, most of the euphoria surrounding the company centers on its ability to extract value from the renegotiation of its cable rights, the lifeblood of the company, accounting for over 30% of its total revenue base. There has also been some speculation that the company might be an acquisition fodder for a larger, cable-focused media enterprise, like AMC Networks (NASDAQ:AMCX).
Since spinning off from former parent Cablevision in 2011, AMC Networks has been on a roll, reporting strong top-line growth on the back of its consistently popular lineup of shows, including Breaking Bad and Walking Dead. Last year, was a continuation of the positive vibe for AMC Networks, with revenue up 17.7%, thanks to ratings records for its hit shows, which provided opportunities to benefit from higher advertising and retransmission rates.
The net result for the company was improved cash flow, thereby funding further content development, and value-added acquisitions. Specifically, I'm referring to its recent purchase of Chellomedia, a transaction that nearly quadruples its international footprint.
Looking for a derivative play
An outright sale of WWE seems unlikely, though, based on the company's recent moves to build its own network, which essentially created competition for its cable partners. In addition, any transaction would have to be signed off by CEO Vince McMahon, owner of a controlling stake in WWE through his preferential class B shares. He has never intimated a desire to sell the company. Thus, investors are left with trying to gauge the probability of the company delivering on the lofty profit expectations that have become baked into the current market price.
Given WWE's lofty valuation against virtually any financial metric, investors might find better returns with the business partners of WWE without taking on any of its business risk. Toy giant Mattel (NASDAQ:MAT), for one, has leveraged the ubiquitous popularity of WWE's superstars among its core demographic to create the #2 best-selling line of action figures. While sales of the WWE licensed products were anecdotally weak in the 2013, Mattel showed its commitment to the relationship by recently extending its partnership and introducing a new product line, WWE Slam City, which will be supported by a twenty-six week animated series that can be viewed on its related websites.
Mattel's recent financial results have shown a definite business deceleration trend, due partially to a notable weakness in its Barbie franchise. Still, the company's multi-year profitability expansion story and diversified product mix makes it a long-term winner in a growing industry.
The bottom line
WWE is an intriguing story, given its large, loyal fan base and its unique position as one of the few, pure-play investment opportunities in sports entertainment. However, given the company's current business risks, including a potential cannibalization of its per-per-view sales by its new streaming network, investors would be wise to watch this story unfold from the sidelines.