The Show Must Go On - Even With An Empty Crowd - March 18, 2020
Value, Deep Value
Seeking Alpha Analyst Since 2015
Graduate of DePaul University, major of Finance. I focus mainly on the Technology, Media and Telecom sector. My style is a mix between Value and Growth.
Summary
- The article is a repost written on WWE originally published March 18, 2020 on my website.
- WWE pulled its quarterly and full year full year guidance.
- Buy rating maintained, price target reduced to $43.
- In the last ten days since we’ve published our initial thoughts on the effect of the coronavirus on our coverage universe, a negative cascading series of events has impacted the broader economy. Among the continued spread of the coronavirus throughout the U.S., the NBA has suspended its season, the NHL suspended the rest of its season, MLB delayed the start of the opening season until at least May and the NCAA has canceled its March Madness tournament completely. State governments are prohibiting public gatherings of all sizes, and this has led to WWE (WWE – Buy, PT $43.00) pulling its quarterly and full year guidance, and announcing that WrestleMania 36 on April 7th, originally scheduled to be held at Raymond James Stadium in Tampa, Florida, will now take place at the WWE Performance Center in Orlando, Florida with only essential personnel in attendance. We view this as essentially a cancellation, with no live event revenue occurring for WWE from WrestleMania, and thus our draconian scenario that we laid out in our note on March 8th has in fact happened, with sports on pause across the country in a development that we didn’t see happening, and the economy in much more of a precarious state in the near-term than we thought. In a fortuitous position however, WWE does have its Performance Center training facility that it owns available to run shows, where the company aired empty crowd editions of SmackDown and Raw over the past week. WWE in theory could do this over the course of the coronavirus’ impact on the economy, keeping its rights fees from NBCUniversal (CMCSA – Not Rated) and Fox (FOX – Not Rated) safe from being cut due to a failure to produce live programming. As of today, because we believe core content rights fees are secure, we are maintaining our Buy rating, but reducing our 12-month price target to $43.00.
- Our estimates may very well change amongst a rapid changing news cycle, however as of today we assume the brunt of the adverse economic impact for WWE (and the economy at large) occurs over Q2 2020 and Q3 2020. For full year 2020, we’re taking our revenue estimate down by $67 million and Adjusted OIBDA down by $12.3 million, driven by declines in Live Events and Consumer Products revenue. For Q1 2020, we believe WWE will generate $19.3 million in North American ticket sales, down 20% y/y. We’re modeling zero revenue from North American ticket sales in Q2 2020, and $10.1 million in Q3 2020, down 45% y/y. From there, we believe sequential growth occurs with Q4 2020 North American ticket sales being $17.3 million, for 2020 North American ticket revenue of $46.6 million. Total Live Events revenues in 2020 we believe will be $67.7 million. We believe WrestleMania 37 happens in 2021 as the coronavirus macro-event lapses, with total revenue from North American ticket sales in Q2 2021 of $39.7 million, augmenting total 2021 North American ticket sales to $98.1 million and total Live Events revenue of $127.3 million, up 88.2% y/y. We also think total Consumer Products revenues take a hit, and will be down 18.5% y/y to $74.7 million in 2020, led by declines in eCommerce and Venue Merchandise. before rebounding to $83.2 million in 2021. The WWE Network could actually hold up well we believe, as the subscriber base is down to the most loyal WWE fans, who we think will look to the Network as a healthy distraction in turbulent times. Because of the unique nature of wrestling and WWE’s fortunate position, its TV rights fees could be more stable than investors may realize, a key tenant in maintaining our Buy rating.
Investment Thesis
World Wrestling Entertainment, Inc. is an integrated media and entertainment company in the business of professional wrestling. WWE provides its programming through linear television via its signature programming, Raw, SmackDown, and NXT, its OTT streaming service, the WWE Network, and through various streaming and social media outlets, as it runs Live Events throughout the year.
WWE has reached an inflection point in our opinion, where their fortunes are tied less directly to its fan base than ever before, and the focal point of its success has become its broadcast partners through record television rights fee deals. As linear television continues to lose viewership, as consumers turn toward OTT options, WWE’s viewers are becoming more valuable to broadcast networks, as television advertisers become more eager to try and reach brands that have a sizeable audience. We believe the stable and predictable nature of WWE’s contractual based television revenue, in conjunction with the potential for a transformative deal for its content to third party streaming services, position the company as an attractive content arms dealer who can reap the upside from both linear TV and streaming in a best of both worlds scenario. These highly lucrative deals should provide tailwinds to revenue and free cash flow growth. A content licensing deal for WWE’s streaming content could come in 2021 when the macroeconomic outlook for the U.S. economy improves.
Looking at a range of options, we believe WWE could generate anywhere from $250 million - $1.1 billion in revenue and $100 million - $455 million in Adjusted OIBDA annually in licensing its content to a third party streaming provider.
WWE should be able to maintain its television rights fees from NBCUniversal and Fox given its ownership of its Performance Center training facility during a period where mass public gatherings are banned by U.S. political authorities. We also assume that an additional Saudi Arabia show occurs in 2020 after macro travel concerns subside, representing ~$40 million in incremental revenue.
In 2020, we believe total WWE revenue will be $1.0 billion, up 10.2% y/y, and Adjusted OIBDA will be $288.4 million, up 60.2% y/y driven by contractual television rights fee agreements. In 2021, revenue could be $1.1 billion, up 8.2% y/y, with Adjusted OIBDA of $331.5 million, up 14.9% y/y as the macroeconomic outlook improves and live events revenue rebounds. Shares trade at 19.3x Diluted EPS, 32.8x Free Cash Flow and 10.5x Adjusted OIBDA on our 2020 estimates. Assigning a multiple of 25x Diluted EPS, 40x Free Cash Flow and 13.5x Adjusted OIBDA, results in a blended 12-month price target of $43.00 per share, implying 26.7% upside.
Risks
Television rights fees from broadcast networks are WWE’s biggest source of revenue. If WWE viewers to its linear television programming fall faster than the rate of linear television programming for a sustained period of time, WWE could see its rights fees reduced in the fall of 2024, which could weigh on shares.
If television rights fees were to experience a significant downtrend, WWE’s financial reliance on its fanbase could increase. Failure for WWE content to resonate with the fanbase may negatively affect revenue and profitability.
Vince McMahon has been the majority owner of WWE for nearly 40 years. Should he no longer be able to serve in his role, and the replacement CEO underwhelms shareholders, investor faith in the company’s prospects could fall, and negatively impact the stock.
If WWE is no longer able to broadcast shows from its training facility while the coronavirus pandemic limits public gatherings, its television rights fees could be at risk of being reduced, which may materially impact shares to the downside.
Running shows in Saudi Arabia for the country’s government presents a degree of headline risk for WWE. Should WWE find itself in the center of controversy because of geopolitical risk and face a significant fan backlash, or not be able to run Saudi shows due to macroeconomic travel concerns stemming from coronavirus worries, this could be a headwind to the company’s business results.
If Vince McMahon sells a significant portion of his stock in WWE to fund the XFL’s continuing operations, this could place pressure on WWE stock.
Failure for WWE to find new wrestlers that connect with their audience could cause a secular decline in popularity of the brand in the long term. Additionally, Should All Elite Wrestling experience a surge in popularity and capture a significant portion of fans from WWE, this may pressure the company’s business.
Financial Outlook
In 2020, we believe total WWE revenue will be $1.0 billion, up 10.2% y/y, and Adjusted OIBDA will be $288.4 million, up 60.2% y/y driven by contractual television rights fee agreements. In 2021, revenue could be $1.1 billion, up 8.2% y/y, with Adjusted OIBDA of $331.5 million, up 14.9% y/y as the macroeconomic outlook improves and live events revenue rebounds.
Analyst's Disclosure: I am/we are long WWE.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.