Tweet thread IV is about WWE, a company I've been following since the early 2000s. Over that time period there have been a handful of occasions where the share price veered too far from intrinsic value. Now may be one of those times.

W (1/x)

I apologize in advance for the length of this thread but there’s a lot to parse out & distill. All that follows is opinion, not investment advice.

I'm guessing everyone knows this business already. If not, watch Raw or Smackdown and you'll get it --- sports entertainment. It's a soap opera for men --- yes women watch the shows too.

The business, and therefore the share price, is currently caught in a negative feedback loop. This has resulted in a very unique media property being valued as if it’s a pedestrian manufacturer or distributor of some sort.

Not long ago some on the sell side had price targets exceeding $100 per share versus the current quote of $40.

If sports leagues like the MLB, NBA or NHL were publicly traded - leagues, not teams - the chart would probably look something like WWE's which isn't pretty.

Live audiences are critical to creating the final product that fans enjoy for all the major league sports. For WWE in particular, audience presence & participation is an absolutely essential part of the show.

The loss of it due to the pandemic has been especially brutal for the company.

Because of this, it is far more challenging for WWE to captivate and entertain its fans. This of course affects ratings and fan engagement and therefore the perception of franchise value and ultimately expectations surrounding future media rights deals.

Loss of in-person audience ⇒ lower engagement/ratings ⇒ lower expectations for media rights deals ⇒ lower share price

WWE’s share price has suffered as this negative feedback loop has continued without an obvious catalyst to end it.

Stepping into this dynamic is seemingly intimidating and as a result a durable franchise with a visionary, economically motivated founder is now sitting 60% lower than all time highs.

What’s special about this media franchise? A few things...

Unlike some other properties, WWE is in complete control of its destiny. It owns all the names and rights to its entertainers. Media rights in all geographies are owned and controlled by the company.

WWE produces its own content without the aid or assistance of its media partners and delivers a finished product to power its live entertainment shows.

The plug & play nature of the signal makes life very easy for media partners who in turn are able to monetize the company’s loyal fan base to advertisers.

Because WWE is scripted and broadcast weekly it is able to iterate far more quickly than other media properties. It has built a tremendous rapport with its fan base over a long period of time. Fans want to be entertained and WWE wants to deliver.

For these reasons WWE has been able to stay relevant, reinvent itself and find rich veins of entertainment for fans time and time again.

This has allowed WWE to do a *very specific* thing exceedingly for its broadcast partners.

The company consistently delivers a relatively large and highly engaged weekday audience, week in, week out. The ability of a single property to anchor an audience this consistently for years on end is unique and valuable.

As an industry insider once told me, media buyers get “bragging” rights when they buy the NBA or NFL but buying WWE helps them get their job done.

Distributors will therefore pay handsomely for WWE’s broadcast rights just like the Fox Network did in the last negotiating round. U.S. rights are now split between Comcast and Fox.

It’s worth noting the recent escalation of rights occurred despite the trend of cord cutting being in place since 2013 and WWE’s own 24x7 network being launched in 2014.

Nothing is guaranteed of course but there's little doubt that wrestling has a permanent place in society. Wrestling is deeply embedded in U.S. and international culture with established leagues all over the globe.

Abraham Lincoln wrestled in his youth. WWE’s popularity has ebbed and flowed over time but it is very unlikely to ever be extinguished.

Is there any doubt baseball or basketball will fail to captivate audiences again? Wrestling is exactly the same. It has a permanent seat at the entertainment table.

As the world returns to normalcy in a post pandemic world, WWE’s negative feedback loop will be broken. When the audience returns, the final product will begin to improve and more closely resemble what it did in the past.

Ratings and engagement will improve as lapsed and casual fans return, driving perceived franchise value higher and along with it the perception of favorable media rights sales.

While investors wait for WWE to tour with live audiences and begin a new positive feedback loop, contracted, escalating U.S. media rights will drive earnings higher over the next four and a half years.

The setup is quite attractive for longer-term investors focused on reflating/post-Covid plays: WWE is profitable, in a net cash position (I’m counting the convertible debt as equity) and is in year one of a five year escalating U.S. media rights deal.

WWE has the luxury of 24 to 30 months before it even has to entertain renewing the U.S. rights!!

To boot, WWE has a $500 million share repurchase authorization in place if/when management believes the market is undervaluing the franchise.

Despite the current negative perception of WWE, there’s lots of growth initiatives that could drive value for the company. CEO Vince McMahon has a good track record of monetizing opportunities over time.

Selling streaming rights to its direct to consumer (“DTC”) network to another partner, international growth and advertising/sponsorship deals are likely drivers.

The development of communications infrastructure globally has allowed the company to interact directly with its fan base and gave birth to the WWE Network.

Vince was an early innovator of leveraging the properties of the internet to create a direct pipe to his fans and lower his reliance on distributors. The network has been an absolute home run for WWE.

It will likely make sense for WWE to leverage broadcast and cable TVs large audiences and promotional ability for years to come. However, the self-owned network could allow the company to distribute some or all of its properties on its own in certain adverse scenarios.

This is potentially a valuable hedge in media rights negotiations.

Interestingly, WWE announced earlier this year that it was looking at “strategic alternatives” for the DTC network. This likely meant a new or existing distributor had looked at acquiring rights to the network.

This was a surprise at the time but given the increasing scale being brought to bear in the streaming business, it’s logical that a large media partner could derive more value from the network than WWE could by running it itself.

For instance, Fox might consider moving the company’s marquee event, Wrestlemania, from behind the paywall and seek a national audience on network TV to drive other parts of its business.

Additionally, ESPN/Disney might seek to drive ESPN+ subscriptions and PPV buys by bundling WWE content into existing platforms similar to the UFC offering.

Speculation focused on ESPN/Disney as the interested party which would be very attractive as having a third major distributor paying WWE for media rights would be an obvious plus.

Equally attractive, if not more, would find Fox interested in the property. Fox immediately following up their aggressive escalation of U.S. media rights with the acquisition of additional properties from WWE would bode well for future rights negotiations.

The lack of an in-person, live audience surely presents challenges to selling these rights in the near term, however it seems likely that as the product improves again, sophisticated, at scale distributors will come back to the table...

as they seek proven media properties to bolster their own businesses in a changing media environment.

There are other things that could go right for WWE such as large step ups in international media rights, new performance centers globally driving more local content/consumption or licensing IP to new platforms like VR - perhaps to a big tech player.

The perception of U.S. media rights value in the near to intermediate term will weigh heavily on WWE shares but it’s possible in a few years that other revenue streams will de-risk this renewal.

At the same time, it’s worth noting that even a disappointing increase in media rights of say 1.25x in 2025, down from 3.6x prior, could still drive great profit growth for WWE.

By my estimates, the market is implicitly pricing in about a 15 to 20% decline for the U.S. renewal and very little growth from the rest of the business.

If WWE simply extended its current U.S. media rights deals flat at 1x right now through 2030 then the shares would likely rally significantly.

WWE shares popped a bit after Q2 as the new media rights kicked in against lower than expected operating costs from the tour being put on hold and producing the show from the low cost performance center in Orlando - props to Paul Levesque for building NXT and the center.

The shares have since faded as investors settle in for a period of ratings/engagement weakness.

Of course there are risks...

Q3 results may come in weak as expenses creep higher from WWE reinvesting back into production costs to drive fan engagement. The company recently moved to the Amway Center and brought the fans and their voice back into the show via digital screens.

Covid or not, WWE is attempting to tweak and improve its product during a challenging period of engagement just like it always does. Roman Reigns recent turn heel and tribe story line appear to be resonating with fans right now.

So being short WWE’s Q3 results may be a good trade in the near term but that may prove to be like picking up the proverbial nickel in front of the steamroller.

Vince McMahon is a rational, economically motivated founder - we’ve witnessed several rounds of belt tightening over the years, including recently - but he has presided over some disappointments: the XFL rounds I & II as well as forays into the restaurant and movie business.

It’s possible he’ll over-invest in the core product or find new capital intensive ventures that capture his attention - no theme park please unless Comcast or Disney pays for it!!

To his credit, Vince has been unemotional on such matters over time and is not shy about folding his cards and walking away from the table if that is what makes sense.

Cord cutting and the fracturing of global audiences may present challenges for future rights agreements for media property owners. A large NFL rights increase could ”steal“ media dollars from other less prestigious properties in future negotiations.

Irrespective, I believe there are plenty of dollars left for key media properties, especially those with a low total cost of licensing that have a proven track record of delivering.

A smaller but still very large network and cable TV audience will remain a valuable part of the entertainment ecosystem and keep distributors clamoring for attractive content for some time to come.

Is there a non-standard renewal out there for media properties that straddles traditional distribution and increased content available on self-distributed networks?

Perhaps one day that will come to pass but count on Raw, NXT and Smackdown being available live on cable and networks TV for years to come.

Vince is going to live forever of course but just in case his wife, children and son-in-law know the business very well. Linda McMahon ran the business successfully in the early years after the IPO.

It’s not widely known but Vince treats public shareholders as true partners in the business. In the past, WWE paid a higher dividend to non-insider shareholders for a multi-year period.

In all my years, I’ve never seen an insider shareholder take a lower dividend so that outside shareholders could receive a higher one.

Vince knows some of his fans are shareholders so he treats them fairly & works on their behalf to create value.

He’s also his own toughest critic - I still remember him saying at an one annual meeting that he deserved to be pelted with rotten tomatoes after a tough year of performance. He wasn't fully joking.

Inside ownership is high at WWE. The McMahons control the vote but still own ~40% of the economics so good decisions and execution accrue real value to them.

Vince is an entertainer and part of the show which can obfuscate his pro-shareholder leanings. As an outside observer for 20+ years, I have little doubt Vince is working very hard to create value on behalf of the public shareholders.

At these prices, I don’t think catalysts are overly important to pinpoint beyond what I’ve shared. WWE’s equity simply seems too depressed relative to the franchise’s intrinsic value.

If the current virus life is a permanent fixture of society with concerts, sporting events and organized gatherings no longer viable entertainment options then WWE is an avoid.

However, if virus life is a transitory stage and we are on the way back to a more normal way of life then WWE may be an exceptional, low risk way to play the post-virus, reflating world.

(fin)