Stock in Vernon Davis is finally here. The world's first publicly traded NFL player will hit the market next week, according to Fantex, the brokerage behind the IPO. Davis, a tight end for the San Francisco 49ers, will initially trade at a price of $10 per share. So should you buy in?
If you've read my analysis of Fantex before, you understand how it's structured. Here's what I wrote earlier this year:
The way Fantex's business works is relatively simple: It acquires a minority interest in an athlete's brand value, which is financed through an IPO. Any investor willing to purchase shares of an athlete's tracking stock should be confident that: (a) he'll stay healthy, and (b) he's marketable.
In Davis' case, Fantex will pay the NFL star $4 million for 10% of his estimated future brand income. Fantex figures that to be around $40 million for the rest of his career, based on two primary factors: contract and endorsement income.
On the field, he's in the midst of a five-year, $36.75 million extension that began in 2010. Off it, Davis makes an estimated $500,000 per year from sponsors like Jamba (NASDAQ:JMBA), NutraClick, and Krave Pure Foods.
Through my conversations with Fantex CEO Buck French, it's clear this is where the greatest upside lies. Unlike offensive peers Ray Rice ($1.6 million), Aaron Rodgers ($6 million), and Peyton Manning ($12 million), the 49ers tight end is relatively under-marketed. And as the company alludes to in its promotional video, Davis' interests range from art to entrepreneurship -- an attractively eclectic profile for any sponsor.
In 2011, for example, he founded interior design company Modern Class Design. A year later, he opened Gallery 85, an art gallery in California. Davis also serves as a store development partner for Jamba Juice, and he's been involved in Olympics promotion in the past.
If you're investing in Davis' IPO, you're banking that his future brand income eventually eclipses his Fantex valuation ($40 million). The discount rate can be played with, but generally speaking, the more his endorsements grow, the underlying value of his stock should improve.
|Estimated cumulative brand income in 2018 if...|
|Endorsements remain constant||$37.8M|
This isn't the entire picture, though. Davis' future brand income is also dependent on how long he plays. Assuming he continues to make around $7 million per season, there's upside after his age 35 season, even if endorsements don't improve.
|Retirement Year||Retirement Age||Contract Income (M)||Endorsements (M)||Cumulative Brand Value (M)|
Herein also lies the risk. If Davis' career ends before 2019, there's a chance his cumulative brand value won't surpass Fantex's estimate. According to the NFL, the average career length for a Pro Bowl player like Davis is about 12 seasons. Given that he entered the league in 2006, then, he'll need to play one year longer than this to make it to 2019.
Of course, as mentioned above, Davis' brand value will break even earlier if endorsements improve -- a good thing for investors. But it's also possible his contract income will decline as he ages. If he loses just $2 million in annual salary, for example, after free agency in 2016, Davis' brand value won't break even until 2020, assuming endorsements remain constant. And if his salary is cut in half, he'll have to play until he's 38 to justify Fantex's valuation.
Just as I mentioned in my coverage of E.J. Manuel, another Fantex athlete, there's an X-factor: valuation. Earlier this year, I wrote, "If -- and this is a big if -- investors value players at a multiple of their underlying brand value, there's more upside potential."
Just as P/E ratios measure the multiple that investors place on a company's earnings, the world of publicly traded athletes can use the Price-to-Brand Value ratio. Above, all analysis of Vernon Davis assumes he'll trade at a P/BV of 1.0. If he sports a P/BV of 2.0 or 3.0, though, it implies investors expect his cumulative brand value to break even earlier.
|When will Fantex Vernon Davis break even?|
|P/BV = 1.0||2019|
|P/BV = 1.5||2017|
|P/BV = 2.0||2016|
|P/BV = 3.0||2015|
A graph is another way to visualize this.
Although the prospect of dividends -- French says Fantex expects to issue them "on a regular basis" -- is exciting, there's still no guarantee publicly traded athletes will have an income component. This, and the fact that anyone who invests in Davis will have zero alternative athletes until Manuel, Arian Foster, and others go public, are real negatives. Because Fantex is rolling out IPOs one-by-one, there could be very little liquidity on its exchange in the beginning. And if that happens, Davis' $10 IPO price may not fluctuate significantly.
Should you buy in?
Until there's a proven market for athletes, it's tough to imagine a scenario where Davis' stock yields Amazon-esque gains. Thus, the decision to buy into the 49ers star should ultimately come down to his prospects as a long-term, multi-year investment.
At 30 years old, it's true Davis is on the back half of his career. But considering he hits free agency in two years, his contract situation could actually improve after 2016. Davis' marketability is another plus, and if you believe in the 49ers' Super Bowl chances, their tight end could receive an endorsement boost with a championship under his belt.
Still, remember the risks. Football is arguably the most violent sport on the planet, and there are plenty of scenarios in which Davis' true brand value might not surpass Fantex's estimate. And because this type of asset is unconventional, it's also possible the market will behave like a fantasy football player, rather than a rational shareholder. If that happens, publicly traded athletes may be more of a novelty than serious investment vehicles.
Only time will tell, and for my money, I'm sitting on the sidelines until more Fantex athletes hit the market. That way, if an investment in Davis goes sour -- say, from an injury or underperformance -- there will be alternatives.