Last winter, I wrote an article about World Wrestling Entertainment (NYSE:WWE) saying that the company is worth a look. Since then, the company's share price jumped from a mid $7 to a mid $11. Currently, the share price has been on a downward move and this may continue because the company does not have the potential once investors thought it did.
WWE's management talks about how the company will double in size by the end of the decade but this is not really happening. In this article, I will explain why WWE can't really grow as much as it says it can.
A History Lesson
Back in the 1980s, wrestling industry was dying, with several local wrestling companies going out of business. Around that time, Vince McMahon, the current CEO of WWE, did something that changed things around for his company. While every wrestling company was operating locally, WWE's shows started to appear on national TV, gaining a huge exposure. Back then, Hulk Hogan made wrestling "cool" again, particularly amongst kids who saw him like a super hero. In the 1990s, the excitement was dying off and WWE's rival WCW came up with a revolutionary idea called "nWO." The idea was that wrestling companies couldn't rely on kids alone and they had to target young adults by offering content that has a lot of blood, risk taking, crudity and sexuality. Later on, WWE took on the idea and the "attitude era" was born with characters like "The Rock" and "StoneCold Steve Austin." WWE's approach was so successful that it drove WCW out of business and it was able to acquire the company's assets for as little as $1 million.
Providing a history lesson on wrestling companies is very important because it will show us why WWE's growth chances are limited. Back in the 1990s, when wrestling was at the peak of its popularity, WWE's flagship show Monday Night Raw was drawing 4-5% in ratings and WCW's flagship show Monday Night Nitro was drawing around 5-6%. Combined, the two shows claimed a little over 10% of ratings on a Monday night, which competed with NBA and NFL matches that were airing at the time. Back then, wrestling was "cool," but it's not anymore.
The "Children-Friendly" Programming Reduced The Demand
In mid 2000s, WWE switched back to "children-friendly" programming where sexuality, crudity, violence and risk-taking were limited significantly. In fact, the company's flagship show got a PG-13 rating. Basically, the company went back to 1980s era where it had superhero-like wrestlers that addressed mostly kids. WWE's management argued that kids were far more likely to spend money on wrestling merchandise such as action figures, video games and DVDs of the shows compared to young adults, so the move made sense to them. Keep in mind that today's WWE is a combination of the old WWE and the old WCW, which used to enjoy combined ratings of 10-12%. Today, the company's wrestling shows generate about 2-3% in ratings, which is very, very weak. Hulk Hogan and his friends moved to TNA to restart competition with WWE similar to the one in the 1990s, but it has been failing miserably. Currently, TNA's shows draw ratings around 1% on a lucky day. Wrestling is simply not "cool" anymore because it doesn't have the factors it did (for example the elements of surprise, sexuality and violence) when it was popular.
In addition to the ratings-decline, the company also saw declines in attendance of its shows during this period. The average attendance of live WWE events was 6,300 in 2010, followed by 6,000 in 2011 and 5,900 in 2012. This is despite the fact that WWE has been having its events at larger venues compared to the past.
Vince McMahon: Only Successful In a Narrow Area
The company's CEO Vince McMahon has been very successful over the years. However, there are also many areas where he hasn't been very successful. I agree that he took a local northeastern company and turned it into a global entertainment giant. However, there are also several places where he didn't demonstrate a lot of business success. For example, in the early 1990s, he created a body-building federation called "World Bodybuilding Federation." The plan was to have bodybuilding competition shows on live TV just like the wrestling shows. The company's pay-per-view shows attracted almost no one and it went bankrupt within 18 months. Later on, Vince McMahon tried to sell bodybuilding products under the label IcoPro. Even though the product was heavily advertised on WWE's shows, it didn't sell much. As a result, this venture also became bankrupt within a few years. In early 2000s, Mr. McMahon had more ambitious goals. He was going to create his own football league and compete with NFL. Named XFL, the league lasted only one season before it went bankrupt (although it had several innovative ideas like the skycam). In the later part of 2000s, Mr. McMahon entered in the movie business where several films were made using popular WWE superstars like John Cena and Steve Austin. Every one of those movies bombed miserably. For example, John Cena's The Marine only generated $18 million in the box office when the movie's budget was around $16 million. Steve Austin's The Condemned only generated $8.6 million in the box office and Triple H's The Chaperone generated far less than $1 million in theaters. WWE lost money in almost every movie it made.
Why am I telling this? Well, this story shows that when Vince McMahon goes out of his "comfort zone" he doesn't make very successful business decisions. WWE operates in a very limited and narrow market and it has to jump far out of its box to see any meaningful growth, and I don't see this happening with the current management which failed at every opportunity in the last 20 years.
The Company's Finances are Deteriorating
WWE generated $526 million in revenues in 2008 when the US economy was on the brink of a recession. Last year, the company generated only $484 million in revenues. Similarly, the company's net income is down from $45 million in 2008 to $32 million last year. Of the last 5 years, the company generated negative cash flow in 4 years. As of 2009, WWE had $208 million in cash; today it only has about $152 million. The company is having trouble with generating cash. In the last couple years, the company paid more in dividends it earned in net income (in the last 4 quarters, WWE paid $0.48 per share in dividends even though it earned only $0.17 per share). While the company currently enjoys a dividend rate of 4.91% (which attracts a lot of dividend investors) it is doubtful that this yield is sustainable.
Also, keep in mind that wrestling is a tricky business. Many wrestlers have contracts that allow them to take extra bonuses if the company reaches certain goals such as increased merchandise sales. Basically, if the company can grow its sales by 5%, its obligations to wrestlers will also rise at around the same rate. This is why it's difficult for the company to grow its revenues substantially while keeping its expenses constant. This is something WWE hasn't achieved in a decade.
In conclusion, I'm not suggesting that WWE should go back to how it was in the 1990s because it's not guaranteed to work and it's not good for the kids. However, the company's current programming limits its earnings and growth potential significantly. Investors looking for growth and/or safe dividends should look for elsewhere as this company is currently overvalued at 60+ times its annual earnings.