Is Newly-merged TKO Group a Reason to Invest in WWE & UFC?

UFC and World Wrestling Entertainment (WWE) have created a new Sports Entertainment behemoth, but is TKO stock worth investing in?

What’s happening?

  • On September 12, TKO Group began trading under the ticker TKO after the completion of the UFC-owner Endevor Group merged with WWE in a 51%-49% split of a company valued at $21 billion.
  • The stock has slumped from its IPO price of $106 a share to nearly $90 after investors were left unimpressed by a new TV deal for WWE’s Smackdown broadcast.
  • There is hope that the combined entity can negotiate better licensing deals but also scepticism that it might be doomed to the low valuation suffered by WWE stock.

Fun Fact:

Nealy 24 years ago on October 19, 1999, the World Wrestling Federation Entertainment, Inc. (now known as WWE) became a publicly traded company, launching its IPO on the NYSE under the ticker symbol "WWF."

What happened with ‘Smackdown’?

SmackDown is transitioning from Fox to Comcast's USA Network under a five-year agreement reportedly valued at approximately $1.4 billion. This represents a 40% increase from WWE's previous contract with Fox. However, despite this significant uptick, investors were not enthused, possibly hoping for a higher valuation for SmackDown and leaving questions lingering about the future home of WWE’s other premier broadcast, Raw. Shares of TKO Group plummeted by up to 16% on Thursday, trading at much higher than usual volumes.

Why did UFC and WWE do the merger?

The merger between UFC and WWE under the banner of TKO Group Holdings appears to be driven by mutual strategic benefits. The combined strength of both franchises allows for a wider reach in the sports entertainment sector, reaching more than a billion fans globally. 

Endeavor has a 51% controlling stake in the new company, with existing WWE shareholders hold a 49% share.

Endeavor's existing strength in the UFC brand, coupled with WWE's global fanbase, offers cross-promotion potential that could drive brand awareness and deepen the penetration of their overlapping fan bases. Such a collaboration leverages the assets of both UFC and WWE in a market where linear TV is shifting towards streaming, making live sports content more valuable than ever.

Source: Yahoo Finance

WWE and Endeavor’s financial outlook

WWE stock reached its pinnacle on August 24, with a record high of $118. Financial pundits and Wall Street experts had forecast a 24% leap in EPS from 2023 to 2024, hitting $3.15. Before the merger, WWE shares were trading at a forward P/E of 31x, which is considerably lower than its historical five-year average of 52x. To put things in perspective, Madison Square Garden Sports, a close competitor in the mid-cap entertainment sector, trades at a whopping 65x.

Over the past year, Endeavor Group recorded a total EPS of $0.56 (diluted EPS of $0.56)with a price-to-earnings ratio of around 40x. Notably, before declining to $22, EDR stock had reached its zenith at $34 in late 2021. Future projections indicated 5.8% growth in Endeavor Group's earnings.

What could move TKO shares higher from here?

Several factors could propel TKO shares upwards:

  1. Cross-Promotion: With more than 700 million UFC fans and 1.2 billion WWE fans worldwide, the potential for cross-selling and promotion is vast. The merger could introduce WWE fans to UFC and vice versa, creating more diverse revenue streams.
  2. Bundling Opportunities: The possibility of bundle packages, considering UFC's 40+ annual live events and WWE's signature events, can attract a wider audience base and boost subscriptions.
  3. Financial Fundamentals: WWE has shown strong financial results, with a 7% rise in sales. With the Endeavor integration, cost synergies might emerge, and the combined company might experience growth in earnings per share. Analyst projections already indicate a 24% surge from 2023 to 2024.
  4. Rights Renewal: The upcoming rights expirations for both WWE and UFC might present significant upside opportunities and downside risks if they underwhelm like Smackdown. Renewing or securing lucrative broadcasting deals can provide an influx of cash and long-term stability.

What are the downside risks to TKO?

  1. Competition from SRJ Sports Investments: The investment in PFL by the heavyweight Saudi sovereign wealth fund poses threats in terms of higher talent retention costs for WWE. There's a risk of WWE's mixed martial artists being attracted to PFL, causing potential subscription cancellations among dedicated fans.
  2. Fan Base Overlap: While the combined fan base is vast, there might be significant overlap, meaning not all fans would be new customers for either brand.
  3. Integration Challenges: Merging two giants in the entertainment industry can pose challenges in terms of corporate culture, operational processes, and brand identity.
  4. Market Volatility: External market factors, broader economic conditions, and changing consumer preferences can also affect stock performance.

In Summary

The heavy sell-off post-IPO demonstrates the lingering uncertainty about the merger between UFC and WWE under TKO Group Holdings. The new firm has the potential to marry the strengths of two major players in the sports entertainment industry but also faces a changing media landscape with the prevalence of streaming as well as challenges from competitors and potential internal integration issues. 

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