Updated: Mar 4
The stock that I’m most excited about for the start of 2021 is a mid-cap US listed stock in the entertainment sector — World Wide Wrestling Entertainment (WWE). WWE has various revenue streams, but is essentially the market leader in wrestling entertainment; a popular pastime stateside which is growing in popularity globally. The three main segments to WWE’s business is Media (Cable, TV, Streaming & Gaming), Live Events (Wrestlemania & Smackdown) and Merchandise (WWE fan ware, clothes and apparel).
Pre-pandemic in 2019, Media accounted for 75% revenue and 80% profit. Within Media, the main drivers are:
TV deals of their live wrestling matches (both cable and streaming)
Licensing for popular computer games.
The next two segments, Live Events and Merchandise, accounted for 25% revenue and 15% profit. In the Live Events category in particular, there is a lower profitability due to the cost of throwing their ‘smackdown’ or ‘wrestle mania’ events. In 2019, the Live Events revenue of $125m filtered down to a meagre $7.7m of profit. Whilst these returns are paltry, the live events are essential to breathe life into the business and connect with fans — they’re also pretty handy at driving merchandise sales too!
Looking at this business in 2019, there was a pretty healthy level of profitability, at around 13% operating margin with good overall revenue growth, particularly in the most profitable areas of the business (Media and Merchandise).
In 2020 however, a dramatic shift occurred in the overall entertainment business due to the Covid-19 pandemic. As you can expect, there were no live events. A key growth driver for the business was wiped out, and in the first few quarters, merchandise sales also dropped by 50%. As for the stock price, the price dropped by 45% from January 2020 to March 2020 (which was also a drop of 65% from its highest point in April 2019, when the stock was valued at $96).
The stock falling to $33 in March appeared to be justified, given that we weren’t aware if vaccines would lead to live events occurring in the future (even now, with respect to new Covid-19 variants, there is a level of uncertainty pertaining). However, this business was able to adapt. Wrestling events were quickly transformed from live to digital and merchandise sales moved online. WWE’s media business segment has so far posted sequential growth compared to the first three quarters of 2019. This is the stable part of the business, and as the core profit driver, it is an excellent asset to have churning out cash even at the height of the pandemic. Now we have a vaccine approved across much of the developed world and health organisations are commencing with inoculation roll outs. This has created cheer across various sectors of the stock market. However, WWE is only 20% up from its March low. The stock would also have to more than double to reach its April 2019 high. Contrast this with a business such as Walt Disney, which has a similar business model with exposures to the same risks. Disney has a large streaming and cable TV business, but is also similarly exposed due to its reliance on live entertainment through its theme parks and movies. However, Walt Disney has overcome this hurdle, rallying 101% from the pandemic low to its new all-time high.
This disparity between Disney and WWE is confusing to me. Although I appreciate there is some justification in a premium for Disney due to its rich catalogue of intellectual property, I do think the market is mispricing WWE, ignoring the reliability of its Media sector and its proven ability to provide growth to investors even during the pandemic. Better yet, the barriers to entry in this business are massive. The main content driver for WWE is its live events, which a competitor would have to replicate in order to compete against WWE. Considering the brand, fanbase and backstory to much of WWE's shows, this is quite a tall order. However, the crux of the barrier to entry argument revolves around return on capital. Even if another business could spin up live events to match WWE, the live segment of WWE's business only retained a margin of around 5%; the media deals are where the profits are. This low profitability in the content business would likely dissuade competitors from allocating capital to a venture such as this, securing WWE's leadership position in the fight entertainment business.
All the above considered, I think there is a compelling case for owning WWE in 2021 and beyond. Whilst WWE is listed on the NYSE, it is 20% owned by Quality UK fund managers Lindsell Train, who recently topped up their holding in the business at the pandemic lows. Whilst not a sole reason for us to invest as retail investors, it is a show of confidence in the business, and it’s always a good thing to have supportive shareholder ownership.
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