Saturday, December 21, 2019

A Current AIM Small Cap Equity Holding: World Wrestling Entertainment (NYSE: WWE, $62.26): “Wrestling with Change”

World Wrestling Entertainment (NYSE: WWE, $62.26): “Wrestling with Change”
By: Andrew Hoy, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

  • World Wrestling Entertainment, Inc. is a communications services company which creates, produces, and sells television and pay-per-view options for live events in both the U.S. and Internationally. Founded by Vince McMahon, the company segments its revenues by Digital Media, Live Events, Consumer Products, and Corporate. Currently, WWE is under the direction of its founder and two co-presidents, Michelle Wilson MBA and George Aldo Barrios MBA.

  • Of net revenue, the Digital Media segment comprises 78%, Live Events comprises 12.5%, and Consumer Products comprises 9%.
  • Flagship media service WWE Network subscriber base plateau.
  • Weak Q3’19 results primarily attributable to increased media rights prices, heavy investment in content creation and activity in the Live Events segment.
  • Focus on expanding brand awareness through new product and distribution channel introductions.
  •  Contractual nature of digital media revenues provides reliably low sales volatility.

Key points:

Sentiment in the third quarter regarding WWE was muted, as the year revealed increased competition in the digital media space. To stabilize their revenue, management increased the price of core digital media rights, the effect of which has yet to be realized. The company spent heavily on content creation for the Digital Media and Live Events segments, resulting in consolidated revenue, operating income, and net income all shrinking. Though the company managed to beat consensus by a substantial margin, these factors had an impact of over -15% on the stock price.

In order to maintain market share and accelerate growth, the company is focused on expanding its brands’ domestic and international reach. Recently, WWE reached an agreement with USA Network allowing for distribution of its recently created NXT brand. Moreover, Q3 witnessed the debut of their SmackDown brand on Fox. The event managed to reach 3.9M viewers, more than doubling their subscriber base for WWE Network. Management expressed an expectation for this to drive substantial revenue growth in the future. The company is poised for growth internationally pending the completion of a media rights deal in the MENA region. Finalization of this agreement should drive approximately $9M in additional revenue.

When WWE was added to the AIM portfolio in 2017, one key driver was its growth in subscribers to WWE Network. Priced at $10, the analyst noted that in a period of just under two years, subscriptions had risen from 816,000 to 1.5 million, indicating a CAGR of 35.58%. Since 2016, the market for digital media streaming has become saturated and WWE’s market share has been rapidly deteriorating. Q3’19 realized a 9% decrease in subscriber growth and management guidance indicates they expect to lose another 10% in Q4’19.

What has the stock done lately?

Over the last three months, shares of WWE have fallen -13.24% from $71.76. The S&P 500 returned +4.66% over the same period. After setting a 52-week high at $100.46, the stock retreated below its 50D moving average and has remained there. Notably, shares have found support in the last month after posting a 52-week low of $52.69.

Past Year Performance:

WWE (-18%) has significantly underperformed its benchmark (+9.05%) for the year. The sharp decline from $100 was spurred not only by the company missing expectations in Q1’19 but was exacerbated by management lowering guidance for 2020. To reverse the trend and outperform the market again, WWE would need a significant catalyst such as finalization of the anticipated MENA content agreement. 

My Takeaway:

WWE was pitched on February 10, 2017 and added to the AIM Small Cap Equity Fund at a price of $19.63, with a price target of $25.77. The stock more than satisfied expectations as it reached all time highs, and still sits above the target at its current price of $62.26. According to market research, the value the of live sports content market is anticipated to grow by 3.4% by 2020. While the company struggled in 2019, I believe that management’s pivot away from the Network and towards monetizing content rights positions them to re-accelerate growth. Though WWE has provided the portfolio with a significant return during its tenure, I am not certain that the downside from 2019 operating results and guidance revisions has been fully reflected in the stock price and therefore believe we should continue holding the position.