Good News For WWE: Stock Could Rise Another 25%

Despite rising around 33% from its March lows of 2020, at the current price near $40 per share, World Wrestling Entertainment stock (NYSE: WWE) seems to still have a significant upside. WWE stock went up from $30 to $40 off its recent bottom, compared to the S&P 500 which has increased around 50% from its March bottom. The stock has underperformed the broader market over recent months because the market went up following stimulus measures by the Fed, while there still seems to be uncertainty regarding the timing of WWE holding events for live audiences. This is significantly affecting its revenues from live events.

With the stock still almost 40% below the levels seen at the end of 2019, we think it still has potential to rise further despite a good recovery over the recent months. Our dashboard What Factors Drove 34% Change In World Wrestling Entertainment Stock Between 2017 And Now? provides the key numbers behind our thinking.

Some of the stock price rise during 2017-2019 is justified by strong growth in revenues and profits. WWE’s revenues increased 20% from $801 million in 2017 to $960 million in 2019, driven by growth in the media revenues especially by distribution of content in international markets. This effect was amplified by net income margins almost doubling from 4.1% to 8% during this period. This was led by a lower effective tax rate, higher revenues and cost-reduction efforts. On a per share basis, earnings doubled from $0.42 in 2017 to $0.85 in 2019.

With the rise in EPS, the stock price also more than doubled during 2017-2019, which led the P/E multiple to rise from 71x to 76x during this period. However, the multiple dropped significantly in 2020 and currently stands at 47x. This was due to a sharp decline in the stock price due to the closure of events for live audiences following the outbreak of the coronavirus pandemic. We believe that the company’s P/E multiple has scope to rise from here as the lockdowns are lifted, leading to a higher stock price.

What is the upside trigger?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected economic activity. The lockdowns have taken a toll on the company’s business operations. WWE’s media segment (subscription-based revenue for its network) contributes 77% of the company’s total revenue, whereas 23% comes from live events and sale of consumer products like merchandise (which in turn is mostly dependent on live events). Over the last several months WWE’s live events have been held without a live audience, thus adversely affecting more than 20% of its revenue base. This was evident in the Q2 2020 results, where WWE’s revenues declined 17% y-o-y, primarily due to a complete washout of revenue from live events. However, the media revenue saw a minor uptick due to increased digitization. WWE, which has been struggling with increased competition and weak ratings for flagship programs such as “Raw” and “NXT”, saw its content going more digital. The company has successfully increased the share of its network revenue from 67% in 2017 to 77% in 2019, which helped the company to avoid a complete wipe out of its top line during the current crisis.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia.  As the global lockdowns are gradually lifted and the economy opens up, WWE’s live events and merchandise sales are expected to pick up. At the same time, the company’s media revenue will continue to remain strong following the October 2019 renewal of its key domestic distribution agreements of flagship programs – RAW and SmackDown, and increase in the digitization of its content. The recent spike in Covid-positive cases in the US is a sign of worry for the company, but in the absence of another lockdown, the stock is expected to head north. With the expectations of revenue and earnings rising toward the end of 2020 and with investors’ focus shifting to 2021 numbers, WWE’s stock is likely to go above $50 post the current crisis. This reflects a healthy upside of more than 25% from its current level.

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