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WWE 2019 Initiation (Summary)

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  Jeremy McKinzie                                                                                                                                                                                                                                                                                                                         Equity Research Analyst                                          

February 22, 2020

A Money in the Bank Opportunity Licensing Spears, Suplexes and Superkicks                                                                                                                                                                  

  • We are initiating coverage on WWE (WWE – BUY, PT $63.00) with a 12-month price target of $63.00, implying 25.4% upside. We believe shares are undervalued on the heels of C-suite exits from the company and uncertainty surrounding the completion of television rights agreements in the Middle East and India. Additionally, WWE has a potential transformative upside catalyst licensing its content to OTT providers such as ESPN (DIS – Not Rated) that could be announced as soon as this quarter. In our opinion, WWE could generate anywhere from $250 million - $1.1 billion in revenue and $100 million - $455 million in Adjusted OIBDA annually depending on the content it chooses to license. We think Co-Presidents George Barrios and Michelle Wilson’s exits from the company centered around disagreement with CEO Vince McMahon over deciding whether WWE’s main strategic priority should be growing the WWE Network, or licensing WWE’s programming to third party streaming services. WWE Network average paid subscriber growth has been underwhelming, with a 10% y/y drop in Q4 2019, and we don’t see trends improving through 2021, as we forecast that assuming no structural changes to the Network, it will end Q4 2020 with 1.32 million average paid subs, down 6.6% y/y, and end Q4 2021 with 1.25 million average paid subs, down 5.8% y/y. WWE’s programming isn’t resonating with either its existing fan base and new subscribers enough to pay for the Network, however we think this is more than offset by the fact that WWE still draws a massive dedicated viewership that regularly outperforms comparable cable programming, and the need for streaming platforms to gain subscribers, as more entrants crowd the space. George and Michelle were very supportive of the Network from how it seemed to us, and in our eyes Vince likely thinks (and we’d agree) that WWE at this stage has more value in being a content arms dealer to various OTT streaming services who will pay a premium in the short term to WWE in the hopes of capturing subscribers long term. In our opinion, the current management team can guide WWE effectively while the company looks to hire replacements for Barrios and Wilson.
  • Even though WWE’s consumer facing business fell in Q4 2019, this is heavily outweighed by the fact that the lion’s share of WWE’s revenue now derives from contractual television rights fees from NBCUniversal (CMCSA – Not Rated) and Fox (FOX – Not Rated) worth an average annual value of $468 million through 2024. Core content fees of $533.6 million will comprise 47.4% of WWE’s total revenue in 2020 according to our estimates, 3x larger than our estimated WWE Network revenue. If a transformative streaming deal for WWE Pay Per Views arises, which is what we surmise is the likely case from the Q4 call, this will have the effect of providing even more sticky and stable revenue to WWE, where it will be further insulated from dependency on its fan base.
  • In 2020, we believe total WWE revenue will be $1.1 billion, up 17.1% y/y, and Adjusted OIBDA will be $300.8 million, up 67.1% driven by contractual television rights fee agreements. Shares trade at 27x Diluted EPS, 44.2x Free Cash Flow and 14.9x Adjusted OIBDA on our 2020 estimates. Assigning a multiple of 35x Diluted EPS, 50x Free Cash Flow and 20x Adjusted OIBDA, results in a blended 12-month price target of $63 per share, implying 25.4% upside.

    (Full initiation report available in our product store)