Follow Mr. Tito on Twitter.com: @titowrestling
MR. TITO STRIKES BACK - Financial Analysis of the WWE Stock's Decline and NBC/Universal Deal
By Mr. Tito
May 17, 2014 - 1:12:37 AM
Welcome to a special edition of MR. TITO STRIKES BACK. As some of you may know, I do work in the financial industry for a living. What I do specifically, well, we'll keep that mystery alive... But I am economist by degree and I follow the stock market very closely. I have my own money invested in various stocks, bonds, mutual funds, etc., and I read many financial analyst reports out of my own curiosity. As a pro wrestling fan, I've followed the WWE Stock closely and have written many news posts and columns about it. However, I cannot claim to be a full time stock analyst.
WWE Stock, to me, has always been tricky. WWE has been a virtual monopoly in the pro wrestling business since March 2001 when World Championship Wrestling (WCW) and Extreme Championship Wrestling (ECW) died while TNA Wrestling just can't make it. For the most part, minus a few quarters where WWE Films cause impairments or expenses were incurred to create the WWE Network, the WWE has regularly turned a profit. However, as you can see by RAW being stuck at 4,000,000 viewers and declining Pay Per View numbers, it could easily be argued that WWE has long since peaked financially. What WWE needed, in my opinion, was a "game changer" that could change the business forever.
Going streaming with the WWE Network was thought to be that "game changer". WWE was too reliant on Cable TV and Pay Per View numbers that with younger generations "cutting the cord" on Cable/Satellite and favoring streaming services like Hulu or Netflix (my personal favorite). WWE had to evolve. Additionally, I've argued that the WWE had a major piracy problem with their Pay Per Views and were losing revenues because of illegal streaming. If the WWE could somehow convince the pirates just to give $9.99 of their income every month, it's a financial win for the WWE. The problem with attempting to catch the pirates or anyone NOT buying Pay Per Views is the risk of enticing regular PPV buyers to join the WWE Network. As seen by the preliminary Wrestlemania 30 domestic numbers, it is estimated that 400,000 people bought Wrestlemania 30 in the United States compared to somewhere between 650,000 to 750,000 domestic buys for Wrestlemania 29.
If you assume substitute effect and a nice round number of 300,000 lost domestic buys, that's $17,985,000 in revenue lost if you assume that all 300,000 joined the WWE Network.
BUT - The whole goal of the WWE Network, again, is to get you to watch the OTHER Pay Per Views along with exclusive content such as NXT or WWE Main Event. Oh, and WWE Legends House which is dominating the weekly top 10 lists in viewership... Anyway, if you assume that WWE fans might just buy 1-2 Pay Per Views per year, 12 * $9.99 equals $119.88 into WWE's pockets and you've become a loyal connected fan. And if you pirated WWE's Pay Per Views, they are finally making money off of you.
Early on, the WWE tried to make the WWE Network into a classical Cable TV channel. When that failed miserably, the WWE teamed with Major League Baseball(MLB)'s streaming service to reinvent the WWE Network into a Netflix-like application to watch Pay Per Views, older shows, NXT, Main Event, and other unique programming. Rumors swirled during late 2013 that this would happen and when the WWE officially announced it, the WWE Stock surged and hit a peak at $31.98, up from the consistent $10.00 basement that the WWE endured for years. Investors were impressed by the modernization of the WWE product delivery and figured it would present WWE with newer revenue opportunities. After all, the Cable TV industry has peaked and Pay Per View numbers, overall, are declining. Streaming services are becoming preferred by younger generations.
But things have gone wrong ever since... WWE Stock closed at $11.27 per share on Friday, 5/16/14. What the hell happened?
Well, I'll try my best to answer your financial questions and add my expertise when possible.
WHY IS THE WWE STOCK FALLING?
It's simple. Investors look at stocks about 8-10 months in advance. In other words, they aren't looking at past figures specifically or what's happening now. They are looking what company executives will perform down the road to grow total revenues or to decline expenses. Why the WWE stock surged above $30 was because investors liked the streaming WWE Network announcement. HOWEVER - investors were expecting a higher subscription rate from the start. WWE announced that it would take 1,000,000 domestic subscribers to "break even" due to high WWE Network costs (bandwidth costs, marketing, employee costs, wrestler/personality payouts, etc.). The early number, which was before Wrestlemania 30, was 667,000, well short of the 1,000,000 subscription "break even" number.
Then, investors were like "meh" to the domestic Wrestlemania 30 buys of 400,000 preliminary buys. But again, WWE Network substitution effect might still be at play.
But this Comcast or NBC/Universal deal is killer for the WWE. WWE receives higher ratings than various other sporting events, such as NASCAR, NBA (well, for regular season), MLB (ditto, regular season), and other types of sports besides NFL. Because of its consistent 4,000,000 viewership for RAW, the WWE was expecting an enhanced television deal from Comcast/NBC/Universal or another corporation/network. WWE was telling its investors that they expected to DOUBLE the existing television deal. However, it appears that only Comcast/NBC/Universal was the interested buyer and because of that, WWE's bargaining power was weak. Viacom/Spike TV, for example, probably learned lessons from 2000's overpaying for WWE programming (read my famous "Winner's Curse" column about that by clicking here. However, Comcast/NBC/Universal did NOT want to lose WWE programming, so hence the higher price paid. But NOT double!
This could be an added factor, but Daniel Bryan has a neck injury. He's the #2 merchandise seller and current WWE Champion. That doesn't help.
WWE Stock investors are looking 8-10 months down the road and they're worried. WWE Network's numbers aren't growing like they should and it risks losing lots of Pay Per View revenues that were once there. Worries about the WWE's long-term prospects creates decreased demand to own WWE Stock, hence the heavy selling of WWE stock.
WHY DID THE INVESTMENT FIRM BUY WWE STOCK?
An investment firm named Lemelson Capital reportedly bought a large chunk of WWE stock today in wake of the large sell-off. Then, to make matters interesting, they called on the WWE Board of Directors to replace executive managers and even consider selling the wrestling business to another company. Shocking calls...
BUT - With Vince McMahon as Chairman of the Board and CEO of the WWE Corporation and combining the shares with other McMahon family members, the McMahons own a STRONG majority of the WWE stock and the votes made by shareholders. Just Vince McMahon alone owns 39,722,341 shares according ot the 2013 WWE Proxy Statement and there exists 74,939,000 basic shares total according to the 2013 WWE 10-K annual report. Oh yeah, as WWE Board Chairman, Vince has the company's internally bought stock voting rights too. Combine that with whatever Linda, Triple H, Stephanie, Shane, etc. may own, and the McMahons will remain in power no matter who tries to buy a "stake".
I think this investment firm just wanted to make noise as they were buying below $12 today on the market. It's a win win for them... When the WWE Network expands to International, there's a lot of revenues to be made by the WWE. This Lemelson Capital group will probably laugh to the bank by buying LOW and selling HIGH once many investors realize that this sell off might be a tad overblown. After all, the WWE is still early into the WWE Network and the NBC/Universal deal was still an increase. Furthermore, WWE has been proven to be "recession proof" because there are no other good places to watch pro wrestling.
Whether or not Lemelson Capital's call of removing executives or selling the company works or not remains to be seen. I doubt it... If you've ever been involved with a company who acquires another company, many big shareholders of the acquired company can get quite loud. They make accusations of executives and suggest that the company should be sold. But at the same time, these loud investors can sometimes have a positive effect and light a fire under the company's ass.
But yeah, Vince and the McMahons have a strong majority of shares owned and retain an even stronger voting position as shareholders with Vince as Chairman of the WWE Board. I highly doubt that the WWE Board, with Vince as its chairman, will remove executives. That's funny.
WHAT ABOUT THE INVESTIGATION FOR VIOLATIONS OF SECURITIES LAW?
Until the Securities Exchange Commission (SEC), which is the Federal Government's regulatory arm that watches over the Stock Market and publicly traded companies, themselves launches an investigation, you shouldn't care. This is a private company named Kahn Swick & Foti, LLC (KSF) who announced that they, themselves, were conducting an investigation. Their choice, no governments putting them up to it. Probably for other stocks, too, they see a massive 43% decline in the WWE Stock and think that something could be suspicious given how WWE management themselves were trying to boost investor expectations with the new television deal and WWE Network.
But as I always say, "investors invest at their own risk". If investors bought on the bubble caused by the announcement of WWE Network and the possibility of a doubling of the television deal, that's THEIR fault. WWE management was doing its job, which is in accordance with the SEC's reporting guidelines, of providing forecasts and upcoming ventures to the public. WWE did nothing wrong here and KSF will find nothing but many investors who bought into the WWE Network and new TV deal hype. The only way WWE management gets in trouble for this downswing is if an executive or someone close to WWE executives suddenly sold their stock during the past week with knowledge of the NBC/Universal deal before it was announced. That's problematic... Otherwise, KSF is just making headlines and many do against publicly traded corporations. After all, firms like KSF help keep publicly traded companies honest.
No smoke here unless someone from the WWE dumped their stock with linked knowledge of the NBC/Universal deal or something else fishy. Seems like everybody is just piling onto the bad news...
SHOULD I BUY WWE STOCK FOR MYSELF?
I will not tell you what you can or cannot do. Additionally, anything that I post here is strictly for entertainment purposes. Anyone reading this invest at their own risk!
In my opinion, the WWE Network still has potential to grow and expand. If the WWE were to enhance the quality of its non-Big 3 (Wrestlemania, SummerSlam, Royal Rumble) Pay Per Views to make wrestling fans want to see other Pay Per Views, they'll be fine with the WWE Network. I also think that the International Markets will prove to be major cash cows to the WWE for the Network. There's a lot of WWE/WCW/ECW content that will be made available to international wrestling fans for the first time and I expect WWE Network to be a bigger success internationally. Plus, again, the WWE can now get international pirates to pay for Pay Per Views as well. They are getting paying fans that they didn't have before.
The Comcast/NBC/Universal deal wasn't as large as expected but it's still a better deal than the previous one. Could you imagine if the deal was the same as the previous one or less? Yikes! As proven by their last deal by expanding to 3 hours and also with Total Divas, the WWE seems to maximize their television deal and expand it with an addendum to their deal. I also think that the business on Hulu will continue to expand. Meanwhile, the WWE continues to have the "double dip" effect of having PAYING fans in attendance while they make money from the television rights. Money comes in like clockwork.
Interestingly enough, there are reports about wrestler payouts being lower than before thanks in part to the WWE Network. Chances are that the wrestlers have it in their contracts about Pay Per View revenues and nothing about additional streaming services that may air Pay Per Views. CM Punk was barking about this possibility early on and in addition to his issues with WWE booking, he was forecasting that there may be reduced payouts due to the network. BUT as an investor, you're seeing possible expense reduction. Worse yet for pro wrestlers, I'm predicting a major purge of WWE talent soon. If the total revenues aren't coming in as expected, the other way to expand that profit margin is to REDUCE expenses. If I were a WWE veteran right now, I would be working hard right now and watching that Developmental territory closely. Your time with the WWE, unfortunately, might be coming.
Furthermore, this sudden drop in the WWE stock might actually scare the WWE and force them to possibly change. Step one is this Monday when they appear to be stripping Daniel Bryan of the WWE Championship. If the WWE were to create a unique way to crown the vacated WWE Title to someone and if they pick the perfect someone, it's a homerun for the WWE. But if they mess that up and Vince McMahon gets frantic about rewriting scripts, there could be major booking trouble on the horizon.
At below $12 and given that the stock went to almost $32 per share, whomever bought LOW on Friday (I'm looking at you Lemelson Capital) could stand to make some serious dough at a later date by selling at a HIGHER price. The WWE Stock pays dividends, too, at $0.12 per share or $0.48 annually (4.26% annual yield at the current $11.27 price). Again, the WWE still makes money and the WWE Network's potential is still bright.
But do whatever you want... I will NOT make a recommendation, as anyone reading this is at their own risk as an investor!
Hope you enjoyed this. Feel free to Tweet me or Comment below if you have any questions.
SO JUST CHILL... 'TIL THE NEXT EPISODE!
Comments and feedback are welcome. Follow and Tweet me @titowrestling or login in below to post comments.
© Mr. Tito and LordsofPain.net/WrestlingHeadlines.com - 1998-2014