Chit Chat Stocks - Formula One (FWONA) | Deep Dive

Episode Date: June 3, 2021

Formula One Group operates motorsport races and holds commercial rights for the Formula One world championship races. Officially Formula One Group is a subsidiary of Liberty Media Corporation. Listen in as Ian, Brett, and Ryan dive into what the company does and where it could grow from here. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (3:06) Industry | (8:19) Management & Ownership | (9:32) Valuation | (13:46) Earnings | (14:56) Balance Sheet | (17:03) Our Analysis | (20:30) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Okay, welcome in. This is the Thursday Deep Dive episode. We got Ian Gray on the line, or on Zoom, not on the line. And we have Ryan here, too, as always. We're talking Formula One.

And to introduce it, I'm going to ask Ian, Ryan, did you guys watch the documentary at all? Yes. And what were your thoughts? I watched the first episode and my thoughts are I'm going to start binging it very soon um it was it totally was hitting all my buttons I love sports and love competition and um it was it was an exciting first episode and I'm looking forward to getting more into it the British announcers they got good accents of course of course Ryan Ryan uh yeah I liked it I think I watched the first three or four episodes it actually gives you a decent grasp of how the

business works too. Yeah, that's a fun part of it too, yeah. Or at least how the league works. How the teams get paid. Right. Yeah. Any of you guys, any of your favorite drivers,

favorite teams? I know Ryan's a Ferrari guy because he's been into the stock back in the day. I like Lewis Hamilton, I think. You're going for Ron,

but you're just going for number one. We talked about Greg, we talked about, we'll mention this, Greg Maffei has a great life. I think Lewis Hamilton

has got a great life as well. He's, yeah, he's done stuff the best of all time. Ian? I know you've only watched one episode. Yeah, I'm going to have to get a little deeper, but I'll get back to you guys on that one. All right. Well, we're going to be talking Formula One, but before we do, we've got to talk about our sponsor, 7investing. And there was big news out recently. Their prices are rising in July. We're still going to be doing

the same promo code with them. CCM, get $10 off your first month. But if you want to get it now, it'll only be $17 a month for the foreseeable future. So if you're thinking of subscribing, this is the right time to go in. They're trying to do well by their early subscribers. Look on the website for all the details as well. But if you want to use our code CCM, $10 off, seven stock picks a month. Great tracker by all the team. Ryan? Yeah. And this isn't just us pump faking you guys either to get you to sign up now before the price hike comes in. But they've added a lot of stuff and they have this library of content now compared to when they started last year. So it makes, I thought this might even be a little

overdue, but you've got a month now to go look at all those recs, look at all the different articles that they've put up on all their different recommendations. Even with the price rise, it's still well worth the price you pay. But Ryan, do you want to introduce Formula One? Yeah. So the structure with Formula One is a little wonky. So it's a tracking stock of Liberty media who owns formula one uh and then the formula one company holds exclusive rights to the formula one world championship so when you look at the ticker it's gonna be there's like f the one for formula one is f w o n a but there's b and w and the k too right it's kind of complicated yeah and so it gets uh yeah that structure part gets a little complicated we're going to talk about it

briefly, or Ian will under the governance section, but just the bulk of this is going to be about the business that sort of underlies the tracking stock. But Formula One, the league conducts a nine-month-long season that holds roughly 20 or more races, which they call Grand Prixs all around the globe. There's ones in Monaco. I think there's one, we'll talk about it here. I think there's one in Texas, right? One in Austin, yeah. They just signed a 10-year deal with my name there's some in the middle east there are some uh in rio or one in rio it's all singapore yeah yeah and uh there's 20 or so sorry there's 10 different teams each team has two drivers uh so 20 drivers all together and they're competing for all these different grand prixs you

get points towards the ultimate championship or there's two ultimate championships there's the driver's championship and then there's the constructors championship um and so some of the teams, if you're trying to picture who they are, it's like Ferrari, Mercedes, Red Bull, McLaren, Haas, which is the American team. And then Formula One generates revenue through race promotions, broadcasting rights, ad sponsorships. But the largest payout is their payout to the teams. So the league pays out money to the teams, and that kind of makes up the bulk of their cost of goods sold um when you look at it on an income statement and then uh the teams get a budget or allocation money from the league that they get and there's prize money for winning and am i getting

all that right yeah the budgets now come in thanks to liberty media uh oh i mean yeah i guess they're funding all the upfront costs stuff like that yeah they make money through broadcast tv rights sponsorships ticket sales kind of like a traditional sports league would yeah and the not tough or complicated things the ultimate goal is just to increase viewership if you increase viewership revenue rises because it goes through all those different things where you have more value for advertisers you have uh broadcasting rights are more expensive and so more tickets right but i'll get into history grand prix motor racing across europe really started in the 20s and 30s and the formula part formula basically just means it's the set of rules that cars have

to follow you can't have like one car with rocket ship thrusters on the back and then like one that's poorly made or there's certain structured rules um and then after world two formula one was actually created they had plans to make it but uh the you know the war you said yeah you said world it's world war two right yeah world war two okay is that what i said yeah all right and uh the first world championship actually took place in 1950 in the uk so they just celebrated their 70th anniversary and in the early days the big manufacturers weren't really that dissimilar from the big manufacturers today uh ferrari alfa romeo i think has a team through yeah they're they're part of red bull possibly i'm not an expert on the sport but yeah right and then

there's mercedes maserati was big i don't think are they still in it i don't think some of the names have kind of changed but they'd all they'd all kind of competed before the war and then they'd made this formalized league afterwards but anyway racing kind of grew as a big sport and then between 2000 and 2015 formula one struggled a bit and it was plagued a lot by political controversy there was apparently at one point i think in 2008 there was like an intentional crash stuff like that to kind of it was uh not what you want from a league a sports league i guess you could say and liberty media which was run by greg mafee and which john malone serves as the chairman for acquired a controlling interest in formula one in early 2017 um and they've since i believe

implemented a budget or they're trying to implement a budget to make the competition more competitive because if you look at it there's times when teams go on runs where they win like 10 in a row or like four years in a row and they have the highest budget they can spend the most on the cars they can spend for the best drivers stuff like that they're trying to essentially put a salary cap on it yeah um it's kind of like if the nba like a sport where if you have the most talent or you have the best stuff you're probably gonna win if it was like baseball with unlimited spending so that that makes it really uncompetitive and they're trying to reverse that okay uh but that's pretty much it for the history uh i don't know when the tracking stock went public i think yeah

they acquired i think it was around 2017 so it's been a few years now ian did you have anything No. Okay. All hit industry. So I'm basically going to give an overview of how big the sport is right now. So according to the company in 2019, it hit almost 1.9 billion views across all platforms in the 2019 season. And that was the highest since 2012. Top markets currently are Brazil, Germany, Italy, UK, and the Netherlands. So it's a huge sport in Europe. 2020 was a tough year as we'll get into with earnings and stuff like that. So I saw a 10% dip in viewership. And competition, it's hard to quantify with a stock like this or a company like this. NASCAR is kind of a competitor in America. IndyCar is a competitor in America. And there's

MotoGP, which is motorcycle stuff. But they're really all different sports. So it's kind of hard to tell. I guess in America, which they're trying to push into a lot, they're going to come up against NASCAR and IndyCar and stuff like that. And then some other things investors might want to look at but may or may not mean anything are their social media following so instagram is at three 13.3 million twitter is at 5.7 million and youtube is at 5.5 million subs and the youtube channel has over 3 billion views i think that's a good tracker of kind of how popular the sport is worldwide um ian do you want to talk about management ownership and governance because it's complicated with this company yeah if it is but i think we can make at least enough sense of

to move forward so as you were as we've been talking about liberty media owns now owns 100 stake in formula one so they're the sole owner of formula one um they own a variety of other things as well including um sirius xm the atlanta braves and the real estate related with atlanta braves so they own quite a bit and what they've done with their company is actually broken the company up into three tracking stocks and so they have the braves group which primarily consists of atlanta braves they have um the liberty serious xm group which primarily consists of serious xm um i think pandora might still be in there um there was something else in there that i recognized but anyways kind of more music radio type related stuff and then they have the formula

one group which includes formula one um there's some other stuff in it like uh they own a little bit of actually the braves group there's a little bit of like cross ownership there and then they own clear or just a small stake in clear it must have been some sort of venture capital investment that's the um thing at the airports now where you can supposedly walk through faster surveillance the thing right they're sneaking into our brains it allows you to cut the line right to cut the line yeah upload your uh give all your information give your eyeballs to the to the government that's what i think right exactly so anyways they own a few different things in there they also own like a stake in the Denver Nuggets arena. And they own some of their own SPAC. They own part of an

IndyCar team. So anyways, it's not just Formula One that's part of the Formula One group that this tracking stock that we're talking about today is, but it's primarily Formula One. So the chairman of the overarching company, Liberty Media, is John Malone. The company's ceo is greg matthews we've as we've mentioned um the formula one ceo was initially chase carry following the acquisition who was an american who had experience in kind of the media world i think he worked for at&t and a couple others um but um and he really kind of there was some skepticism about him when he first took over formula one because he was an american didn't really know the sport that well but he really tried to not um americanize the sport that was the fear but

try and kind of modernize the sport and equal the playing field a little bit and so he implemented some stuff like you were talking about ryan this um kind of salary cap type idea so that they he talked about it being um the lester chance right that some underdog could actually win every once in a while um like in the premier league a bunch of years ago so um he's he really kind of pushed forward some efforts like that he also um increased the value of a lot of the teams immediately by creating a bond necessary for new teams. And so I think it was $200 million. So basically increasing the prestige of the teams and the cost to start a team, which then raised the value of all the other teams. And so anyways, he did some things for the sport that the owners were really

happy with. He just stepped down as CEO and Stefano Domenicali was made CEO. And he is more of a formula one insider so he was just made the ceo in january of 2021 he was previously he was the team principal for team ferrari which is kind of like the correct me if i'm wrong but that's kind of like the manager of the team or the general manager of a team um in american sports and he was made the team principal um of ferrari and he was that in that position from 2008 to 2014 and had quite a bit of success during that run um i think they won uh maybe four championships and then the ceo of lamborghini the car company um from 2016 to 2020 and so i've been very involved in that world um whereas so whereas carrie was more of an outsider but made kind of really well-regarded

efforts to level the playing field in the sport stefano is known for knowing the sport inside and out is more of an insider and hopefully gonna um be good for taking the taking the league to the next level yeah that's fascinating it's interesting to see what they're going to do with this new management team. I think that was a great overview of the complications. We gave you a tough task this weekend. I'll hit the valuation quick. Market cap is about $9.34 billion from when I was looking up. There's three different tickers, but I was looking at the FWO and A1. Enterprise values end up fairly similar, but again, make sure to do your own research, get all this stuff down because I'm not going to be able to get it covered entirely in the podcast. Enterprise value is about

11.3 billion. All 2020 valuation ratios are totally screwed up. Their revenue got hit really, really bad. So you're not really betting on trailing 12-month multiples here. But if we want to base it off of the 2019 income statement, EBITDA revenue is 5.6. EBITDA operating cash flow is 38. I was using Kloyfin. They use their separate EBITDA number, but it's like operating income instead of earnings. So they kind of do it. They call it OEBDA. I think that's just their internal thing. So their EBDA, OEBDA, O-I-B-D-A was about 23.4 based on the 2019 numbers. And the big question is, if slash when financial return to 2019 numbers and continue growing. That could be this year, might be the year after, who knows. But I'll keep that simple. Ryan, do you want to

Yeah. And I'm going to use the 2019 numbers as well, just so you get sort of a normalized view. Because if you think about 2020, a lot of the races, there weren't a lot of fans there, which is a huge part of Formula One's business. Then we had 17. So some of that was shut down. Only 17 races. Typically, I believe this year they're supposed to do 23. Yep. So I'll just dig into the numbers. They had $2 billion in revenue in 2019. That was up 11% from the year before. They had $450 million in adjusted operating income. That was about 20% from the year before. And then operating cashflow was about $300 million. So that puts them at an operating cashflow margin of just below 15%. The company has about 31% gross margins because it's

little bit like spotify in that the league has to pay out the teams the way spotify has to pay out rights holders that's kind of the way i think about it you have content yeah yeah and that's always going to be that i'll talk about it later but it limits a little bit of operating leverage because those teams are always going to want a slice of the pie yeah as a percentage um because they see it as them earning that money that doesn't mean uh the bit the league as a whole can't grow um but there was almost 450 million in depreciation and amortization costs it's a little hard to tell what that was from because they didn't actually break it out and then so i just say but basically just pay attention to operating cash flow and free cash flow it's complicated you

got to do your own research business one too much information for just to show yeah and there's not a whole lot of stock based compensation they had 21 events in 2019 and they're expecting to have 23 events in 2021 um that's just added revenue uh with each event uh but there is there's sort of a cap to that because logistically they can't ship the cars to and from place to place to have like 40 grand prixs in a year yeah max is going to be 23-ish 25 maybe yeah and so there's sort of a threshold there and the nine-month season they have to get it all done in that time All right, Ian, you want to hit the balance sheet? Yep, and before I dive into the balance sheet, I'll just make one last comment on tracking stocks.

You're probably tired of hearing about them now, but they were popular in the 90s, from what I've read, to kind of help companies break out the results of their more traditional business and then their more aggressive internet businesses, and so that they could get a higher multiple in their internet business and really show people the results they were getting. And so that's what they've traditionally been used for. In this case, it's kind of just to see the different operating groups here. But what it means is that sometimes these balance sheet items, if I'm understanding this correctly, sometimes these balance sheet items can actually move around between the tracking stocks because they're still all under one company.

And so you really want to do your research here to understand the management team, because at the end of the day, you're really trusting Greg Matthews, the CEO of Liberty Media Group, to correctly allocate things to Formula One Group and that you're trusting his decision making at the end of the day. So that being said, and that some of these balance sheet items have actually changed in the last couple of years, but currently the Formula One Group has cash of about $1.7 billion on the balance sheet. they have goodwill and other intangibles of nearly $8 billion. So it actually makes up the majority of assets is are these intangible assets, which isn't something I'd love to see. And it means that some of that type of stuff could get written down and be a hit to gap earnings. It's not that's not a huge concern in a case like this, because we're not valuing it based on gap earnings. It's actually generally not not making money on a gap basis because of all the depreciation and amortization. And then they have debt of about 3.55 billion, which is a little more

concerning. They have mostly, most of that is a term loan at about a 3.5% interest rate, and it's tied to the LIBOR rate. But they say they have interest swaps too. So if interest rates were going to rise, it would stay closer to that 3.5% interest rate. And then they also have convertibles, our portion of that debt. From what I could read, it looked like they would not be converting unless there's some significant appreciation in the stock. But you should also do your own research there. The major concern for me on this balance sheet is just the amount of debt. They've only got about two times EBITDA to interest expense in a normalized year of 2019. And so they're paying a big chunk of that EBITDA, that cash flow and interest, which

it works. It's fairly highly levered. It works if EBITDA is steady. But if they were to have a prolonged downturn um it would be a little bit of a problem i think it's it seemed to me and it's a different type of business than we're typically looking at but it seemed to me like there's a lot of debt on this business yeah you gotta expect cash flow is gonna grow for sure it reminds me a bit and it's not apples to apples but it reminds me a bit of iac and match group match group was their best asset you could maybe argue formula one is now um liberty media's best asset and And with Match Group, they're like, all right, we're going to, we'll give you $3 billion in debt when you guys leave us. They're like, shareholders are like, all right, I guess we'll take it.

But no, I guess that's how it goes. I mean, management with this company is not a stranger to debt. And they've been in this business, at least John Malone, for a long time. And they really understand the media landscape. Yeah, if there's anyone you don't have to worry about debts, these guys, I mean, they have such a track record. So, yeah. All right. Let's hit the ad break and we'll get back and talk more of our analysis, I guess, of Formula One. you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply okay welcome back next up

we got product experience um we're not racers i guess so it's tough to get the product experience but any actual evidence uh ian you have anything on this uh like i mentioned at the top of the show i i really love the first episode of the the netflix documentary and i'm looking forward to diving more into it it's it's the type of sport i could definitely see myself getting into um if i have enough time to squeeze another sport into my life but it was um it's really it's really cool i think yeah so it's one of those i mean it can be pretty casual it seems like there's only maybe an event once every two weeks on a sunday morning spending that hour watching yeah i mean anecdotally a lot of people i know have been watching it now so i don't know ryan uh i mean

the event in monaco looked like heaven uh that just looks like they spend a lot of money which is good to formula one yeah i anytime there's a big race there's just something uh sort of monumental uh that it kind of brings this like feeling that like everyone's everyone's eyes are on it especially when you put it in big cities like rio and there's uh singapore it's fun to watch even even as someone who's not that into cars it's fun to watch yeah after three months I'd say I'm not an expert, but you can, you can pretend to be one on FinTwit. Yeah. I would just say too, I think one of the things that's interesting to me and I haven't,

like I said, I haven't spent a lot of time studying this sport, but it's just how much strategy there is. And the race is almost a formality at the end of the day, right? They're doing all this work up front to try and get a good position for qualifying. And yeah, you can move around in the race and you have to be on your game in the race, or you're going to lose lose position but that just how much of how much work up front there is to to kind of determine where your spot is in the league it's almost like there's these huge teams

of hundreds or even thousands of people working on the cars and trying to get everything fine-tuned it's just there's so much strategy in it that it was it's really interesting to me in addition to the car aspect of it and how important people other than the driver are uh the engineering team yeah yeah man you watch it on the show like someone forgot to tighten a bolt on a tire enough and suddenly the race is done right your heart yeah your heart sinks you feel so bad for them and i think you know yeah the qualifying is big too they're trying to make that saturday event it's more of a thing i think they're changing up the rules on that doing like 100 100 kilometer sprint or something i don't know the exact rules but they're trying to make that more exciting

um all right let's not belabor that section competitive advantages ian what do you have i know it's interesting it's a sport so what are your thoughts yeah well it's going to turn out i am kind of going to belabor that point because my competitive advantage is adrenaline um it's kind of a bizarre one but i think it's real i watched the first couple minutes or the first the whole episode of that netflix series and you just see the car zooming by and it's just like wow those guys are flying like yeah you have the cockpit camera you're seeing these cars spin around the corners you know spin out even bump each other sometimes and it's just it gets your it gets your heart heart rate going um the sounds the imagery the drama it's just exciting

and i don't think this is entertainment that's going to lose its luster and especially as they continue to innovate it's just there's just so much adrenaline there it's it's really it's an exciting sport yeah i think it's really similar i'll add uh their top speed in formula one is faster than nascar and stuff like that and so and i've heard from people that were never car fans or anything like that never race car type fans they're like oh that's not a sport there's just a bunch of people driving and then you go to an event and you're like okay that is insanely hard to do and it's and they're all tight like capturing yeah they're a foot away from each other yeah i mean ryan what's yours i think we all have similar competitors uh it's an iconic

brand i don't you can't replicate what they've done and the history and culture is a huge part bit uh it's a lot like any big sports league it's really hard to just the only way i think a league dies is on its own or like the number one team leaves yeah yeah and it's just like it's you have to sort of kill the league like you have to do things to sort of sabotage yourself instead of like if i just started a formula one competitor like no one would care i mean even like major league baseball has made plenty of blunders over the last decade and there's no one even close to competing with them and like ferrari is like the yankees if they decided to leave that would be hit like half of the fans are ferrari fans so yeah but i mean there's no there's no way

ferrari would leave exactly all right what about you um yeah i mean i just think you know just like you guys history rights scale uh you know it's hard to quantify but it's like with other sports football soccer basketball all these leagues switching costs are extremely high for everyone in it. You need everyone to leave, which means that you can't just have one person leave. Anyone that has any part of the value chain. The big question is the durability of the growth. It's not the moat. The industry is durable and there's a moat, but the question is how much can they grow as a sports league? I guess we'll hit that next with future growth opportunities. Ian, what do you have for me formula one is just a content machine um the netflix documentary i

think is a great start of that and just really shows the power that telling a good story and having an exciting sport can have for you um but the possibilities are out there they're already doing some of this but podcasts movies esports merchandise um even with the rise in sports gambling in the united states they've been citing a lot of their fantasy numbers and how many people are playing fantasy formula one i would like yeah that'd be fun yeah and i just i there's just so much you can do when you have a good content product like that and so many different ways you can monetize it and as far as the esports goes um they have a formula one video game and in 2020 there was 273 000 participants in the pro series qualifying rounds of the formula one

esports league um 273 000 that number jumped up to nearly 500 000 in 2021 so rapidly growing it's the type of sport that really lends itself i think to esports um people can drive you can get these big driving simulators and they have like a formula one league where the the esports drivers are starting to become known themselves um and it's just it's really i think it's a cool thing and it's also something that the real drivers and i know netflix experiment or not netflix nascar experimented with this a little bit of having the real drivers actually driving simulators during the pandemic and i think formula one has that capability too where the drivers um can drive in these simulators and play the video game as well almost as well as they can probably drive because

of the similarities and so it's just it seems like a great fit for an esport and they they're really making good moves there and i think they'll just continue to crank out good content and and be able to monetize in a ton of different ways yeah i want to be surprised if gaming like gaming broadly made up a decent portion of its revenue in the next five to ten years i put two notes on that ea sports just brought the right bought the rights to formula one i think that gives them a lot of you might not think it matters who owns it but ea sports is the best track record of building these global sports video games i think it's a good hand with them and they just announced this small thing with uh free fire the big c limited game that's huge in

southeast asia and latin america i believe i don't know anything about the game but they did something with formula one to get like mclaren drivers and mclaren cars on there there's a lot of opportunity for you know f1 stuff and maybe roblox or stuff like that racing games licensing for all the you know the formula one styles and items and stuff like that formula one mario kart Mario Kart. Yeah, that's a little different. We'll see. But yeah, Ryan, what are yours? Getting a Chinese driver into Formula One. So find me value. He had some good slides on the company and I recommend going and looking at it. And this is a growth opportunity that he talked about. But it could spur a lot of adoption of Formula One across China since it gives Chinese consumers sort of like a home team to root for. uh and right now i'm probably going to butcher this name but guan xiao uh is currently in formula 2 or f2 um and he's working to secure his license to drive an f1 uh more viewers means more

revenue uh using china as a market uh that's a huge untapped market for sure for sure and think about it uh if you're say listening to this you're from the united states if there was a u.s driver which there isn't one currently i mean you probably root for him or her i guess it's just there's uh there's no woman in right now but the it's kind of like the olympics it's the olympics it's why i think there's a huge want in soccer to get the u.s team up and running because they want that u.s fan base yeah you know it's the same type of deal um i'll hit mine it is making the move into the united states so there's a race coming to miami in 2022 with a 10-year agreement seems like the perfect city they could probably do vegas and miami um and that seems like the

perfect combo right now the other one's in austin that seems solid but i mean this seems like vegas and miami are the two best ones yeah and the netflix series did create a rapidly growing fan base you've seen recently this is a bit anecdotal uh barstool with the number one sports podcast had christian homer on the show so they're going to get their fans into it the ringer uh one of their popular shows like the the ryan rossillo show i think it's like third or one of the top five sports podcast is getting into it as well so that could bring extra growth for a younger audience. It's really hard to quantify it, but the sport, I don't think there's any way around it. It's definitely growing in the United States right now. Yeah. All right. Highlights and low

lights to close things out. Ian, what are your thoughts? Highlights for me start with the sport and the excitement of it. You can't really match that, at least in any of my other holdings about just how cool it is, like how cool of a business it is, right? It's just cool in every aspect of that word um i think um a couple more highlights though or if the sport were to expand to the u.s and china in a big way and gain some big viewership there there's a lot of potential upside in those markets and it's a content machine as i mentioned um i think it's got some it's going to be a steady grower i think with some upside potential of china and the u.s really take off even margins of about 20% forecasted to grow to about 26% by 2023. So, um, even some improved, a little bit of

improving profitability in the next couple of years forecasted the low lights for me, the big thing is, um, the debt, just a lot of debt. And I don't know if I understand the business well enough to be comfortable with, um, paying half their EBITDA towards debt every single year. Um, and then secondly, I'm, you know, I think another potential low lie is that the sport just doesn't catch on in china and america and so it never has that really big upside that it could could have but anyways yeah i guess uh we mentioned the big variable costs from the team but they do have some fixed costs with logistics those are going to probably stay around the same each year from traveling people everywhere and then the fist cops fixed costs of running running

the events so that could help with the margins yeah and i think the last the other piece of the EBITDA margins is just the more they do, they get this tangential revenue from the stuff, from the content, from the Netflix documentary, from the e-sports that's higher margin business than the actual, than the core business of the racing and selling tickets and stuff like that. So I think that there's, I think that's where some of that EBITDA margin growth is coming to.

For sure. For sure. Ryan, what are your thoughts? It's a super unique asset. There is sort of that moat that we talked about. It's also seems kind of, it seems like it's one of those businesses that's actually really enjoyable to be a part of. My low light though, is that there's limited operating leverage just because you're capped on the amount of races you can do. You have to pay out a certain amount to your players or teams. And you can't just add a bunch of more teams because that kind of ruins the prestige or the value of being in the league um so it's a little bit like spotify in that way i'd also say i'm not

a fan of leagues being public i'm not a fan of when sports intermingle with public markets and the reason i say that is because it's sort of when push comes to shove the integrity of the game is always going to supersede shareholders and the fans are always going to be more important um and while it might be fun yeah super league's like the prime example um when you try to maximize sort of revenue for whoever has money invested in the business it's real easy to just point your finger and say you know we're not corporate this is a sports league there's just that risk i guess uh with uh formula one yeah for sure for sure um highlights for me uh growing brand of minimal competition like you guys said they have a new concord agreement which is the team and league

agreement like each league has they just call the concord agreement uh and the details are unknown like a lot of these things but management said it's a better deal for them it goes through 2025 and it gives them a lot more upside i think and again these are unknown so you can't really bank on this if say the league grows a lot there might be a tiny bit of say all right the teams get less of the percentage as you get bigger, but there's still that variable cost in line. I like the growth of the sport in the US. Growth of sports broadcasting rights around the globe is very important to them. Those are very valuable assets. You can see ESPN Plus or somewhere like that throwing a lot of money to get Formula One exclusive on its platform.

Getting that Chinese driver could be good. They have F1 TV that is going direct to consumer. that's an OTT service for the diehard fans. And then with their deal in the US, and I don't know where ESPN might just be in the US. So they have a short deal with ESPN right now, that can be renegotiated with the growth of say, Drive to Survive and Miami in 2022. So that opens them up to way better broadcasting rights in 2022 and 2023. That can give them a step change up in revenue, depending on how well things go in the US. Lowlife for me, you know, ceiling on the growth for a sports league as an investor you're basically hoping for like low growth and something that's possibly a permanent asset something that can be around for 100 years and that they'll

continually buy back shares as kind of liberty media or you know these type of uh this management team this group of big shareholders is known to do um all right more or less interested in kick things off for us i'm less interested but it's a tough one for me because i like i like the sport i think uh so far everything i know about the sport i like it um it's interesting to me i think it's going to continue to grow in popularity but i'm not sure it has enough growth in it to really be a great grower and i'm not sure it's has enough of a um it doesn't seem like a bargain right now either valuation wise like it seems reasonably priced um but it just doesn't quite have um a super attractive return to me now that being said i'm not going to get

on anybody for investing in this it seemed like a like it's the time i think sports leagues over time just about every single one of them has gotten rapidly more valuable um over the last 30 40 50 years and a lot of that's due to like tv rights and stuff like that and if there's going to be a catalyst like that that continues to grow formula one could be a huge winner but um it it just doesn't quite get there for me yeah right i'm a little less interested uh i would love to be Greg Muffy or a large shareholder in the company. I'd love to be John Malone. That life seems

great, but I don't know if I'd want to... I don't think you'd get in that position by owning more mature assets like this. I guess I'm just... There's limited growth.

Let's say it's growth. You guys might be underestimating the growth. The NFL could be worth $100 billion if f1 they have close to 500 million fans now that gets to a billion like some of the most popular leagues and they really get the numbers better yeah there's less events than the nfl i think there's potential but yes there is the limited upside there is the debt i'd say i'm slightly more interested just because of the permanency of the asset um valuation is tough valuation is

definitely tough you can kind of maybe see through to where they're training on maybe you know 2023 multiples like 20 you know 15 times or maybe if they execute but with something that's low growth at the at a higher multiple that does make it tough if say you know right now we're young we're a little broke but say if you had a fun portfolio you know stuff like ferrari callaway for me this would be in there this is so in the fun portfolio i have a friend that he may may not be listening but he's just like yeah I'm going to invest

in Callaway Ferrari Formula One and I was like that sounds fun go right ahead and do that that fun portfolio

you know this makes it in yeah and with if they hit on some of those growth opportunities we talked about

this could definitely outperform the market for sure for sure Ian anything else before we close things out nope alright

well that's going to do it for this episode as always use our code CCM stock for next week stock for next oh yeah

right right Corsair Gaming. We're going with Corsair Gaming. They supply premium streamer equipment and gear and stuff like that. So PCs, keyboards, mics. There's software to it as well. Software component. Kind of interesting.

It's a little mini conglomerate in that space. We like the video game industry. It is interesting. All right. Yeah. False start on the end here. As always, make sure to subscribe to 7investing. use our code CCM to get $10 off your first month. Remember, we are not financial advisors.

Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Clients in Arch Capital may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time. Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siyaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned.

And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. you