Chit Chat Stocks - WWE (WWE) with Nick Sciple

Episode Date: April 28, 2022

World Wrestling Entertainment (WWE) is an American professional wrestling promotion. The company now operates through three segments: Media, Live Events, and Consumer Products. Listen as Brett and Ryan ask Nick questions about the company, its business model, and valuation. Enjoy the show! This episode is sponsored by Stream by AlphaSense, the highest quality expert network library. Sign-up here: https://streamrg.co/CCM Subscribe to 7investing with the code "Money" and get $100 off: https://7investing.com/subscribe/aff/4/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested to see more of Nick's work? Find him on Twitter here: https://twitter.com/investingnick?s=20&t=p_m4HrpeohPY_Wn-BOPHPQ Contact us: [e-mail]  Timestamps WWE | (4:10) Talent Risks | (16:13) Competition | (30:49) 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. This is our deep dive show where we interview an expert or an analyst on a single stock. Sometimes it'll be two analysts, but usually it's just one. And today we interview Nick Seipel, who's been a friend of the show. And we talk about WWE or Worldwide Wrestling Entertainment. Fascinating pitch because it's a company I haven't really looked at. Were there any highlights from the interview? I think, well, let me just pitch people to listen and that is this is very similar to formula one from a unit economic standpoint it seems cheaper maybe well cheaper yeah i'm not stock you can do do your own valuation work but very similar where it has almost this monopoly there's competitors trying to come out sometimes

but it's basically monopoly because it's a sports league it's also entertainment so it's scripted and all that good stuff uh with i just think it's a good pitch that nick gave because the i don't know the media rights stuff the capital allocation there's just a lot going in their favor and it seems pretty cheap obviously not investment advice but it gave us a great pitch and if you like wwe like this could be one of those fun stocks to own like i know that if there was your favorite sports league that was public like say ryan your favorite is you know maybe the major league soccer one of the european ones if one of those is public you probably have a little fund shares as well. This is one of those fun companies if you like these types of things,

wrestling, UFC, whatever. Yeah. And it's fun just to understand how the business actually works and how they make money. But before we get to the interview, we want to talk about our partners. It's Stream by AlphaSense. They're an expert interview transcript library. This has served as a pretty good supplement to, I think, just about anyone's investment process. If you're not familiar with what Stream offers, basically, you're getting very candid conversations with industry experts and sometimes company insiders or ex-company employees. And you're really getting a good grasp on what are sort of the ins and outs from someone who knows the business intimately well. And they cover industries like tech, consumer goods, industrials, real estate,

literally, I would say pretty much every single industry. Probably oil and gas at this point. There's probably a lot of people looking at that now. Yeah, definitely. And they have over 10,000 call transcripts, um, 300 expert interview interviews come out per week. So it's a bunch of new content as well. Uh, but you've got a whole library to get through. So feel free to check them out. It's stream RG.co backslash CCM. That's S T R E A M R G.co backslash CCM. Go there, sign up for a 14 day trial. It's free. Use our promo code CCM. But without further ado, let's get to the interview. Welcome to Chit Chat Money. On this show, hosts 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. All right, welcome in. Today, we are joined by Nick Seipel, now multi-time guest, recurring guest. Three or four times. Three or four times. He is a senior analyst at The Motley Fool Canada. And today, we're talking

about a company that it's one of those companies you probably don't think about as a public company, but it's WWE or worldwide. Is it worldwide entertainment? World wrestling, entertainment, world wrestling, entertainment, WWE. Yeah. Happy to be here with you guys. I think this is only my second time on here. Maybe like ghost me came a couple of times when I didn't, uh, when I didn't know, but yeah, excited to be on here, uh, you know, with you, I was on here a little over a year ago.

We talked about GameStop and match. I'm happy to talk about WWE, uh, today with you. All right. Uh, and how did you come across WWE? Well, two questions. How'd you come across WWE, the, like the entertainment brand and then how'd you come across as a stock? Sure. Well, yeah, the WWE, the entertainment brand, obviously I was, I'm a nineties kid. I was born in 1993.

So, uh, you know, I watched on gold, Steve Austin and the rock and undertaker and all those sorts of folks growing up. So certainly exposed to the brain. You can find like papers from when I was in like kindergarten talking about my favorite things was like WCW, um, and all that stuff. Um, and then kind of like a lot of people kind of lapsed from, uh, kind of paying attention to the brand for quite a while. Got back into it when I was in law school because I needed something that, you know, all this like smart people talk at law school every day. I needed

some like, you know, turn your brain off type of content. So, I got back into WWE, I don't know, probably 2016, 2015 or so. As a stock, you know, I've followed it more closely, I would say, going 2018, 2019 period. It was an interesting company to follow for quite a while because of what they were doing on the direct-to-consumer streaming. They'd taken the WWE network. Traditionally, they'd sold their pay-per-views through cable networks, that sort of thing. They had brought their pay-per-views in-house to the WWE network. So it was an interesting kind of case study in this evolution of streaming and owning your audience. But what got interesting to me as an investment really was 2020. You had this big change in

management at the end of January 2020. So before the pandemic happened, you had the bottom of the fall out of the stock a little bit. It was down 20% in a day when the former co-presidents left. And that kind of signaled a shift in the strategy for the company. And that was double underlined in August 2020 when you had the new president of the company get brought in, new chief revenue officer as well, which is Nick Kahn, which had been WWE's agent at CAA, had been the head of the television department at CAA, negotiated a lot of their rights deals in the past and really kicked off this transition from, you know, WWE Network distributing some of their content in-house to really becoming more of a licensing story, which is what has me excited about the company

today. And the, Brett was showing me this before we jumped on the Zoom, but the CEO is that, he's that like almost famous character from all the GIFs on Twitter. Am I getting that right? Or the founder of WWE, right? Vince McMahon. Absolutely. Vince McMahon is the largest shareholder of the company. I think it's something like 37% of the shares outstanding he owns. It's also a dual class structure. He controls the company in a really significant way, has controlled the company all the way since,

I think it's the early 80s. He bought WWE from his dad and kind of created the modern history of the business. So before Vince McMahon kind of took over WWE, it was a regional business. You had territories in the Northeast and the Southeast and kind of across the country, you had Canadian territories

and Vince McMahon took over the company, kind of barnstormed across the country on the back of cable rights deals, TV, that sort of thing, really monopolized the business. So by the end of the year, the early 2000s, you had WWE. That was all that was left. There was Monday Night Wars, that sort of thing. So yeah, that's Vince McMahon. Vince McMahon is still running the company today. He's the one who kind of took WWE from this regional brand to now this global wrestling empire where there really isn't a close number two. Okay. And how does the business actually work? Because it doesn't seem super intuitive. Like when I first think about WWE, like how they make money. So kind of how does it work and

what exactly are investors buying into? Sure. I mean, the analogy that I would use for WWE is WWE is like a superhero universe. So you think about Marvel has all this collection of different characters. You've got Spider-Man and all those sorts of things. And you build stories around these characters um and uh and wwe is the same way you have characters like andre the giant the undertaker stone cold steve austin if you look at the rock and john cena they currently play superheroes on tv so you have this superhero universe that is built up over time that is monetized you know if you think about marvel was monetized historically uh through comic books wwe monetized historically through tv programs so if you look at 2019 numbers which you know normalizes

us to live events happening, those sorts of things. Media rights for 77% of the company's revenue and essentially all of their EBITDA, which is their EBITDA type number. So the main way that the superhero universe gets monetized historically is the TV programming. So the flagship TV programs, Monday Night Raw has been on TV since 1993, is the longest running episodic TV program in the US. You've also got Smackdown that's been on TV since 1999. Those are kind of the core drivers of the business. You've also got, I mentioned, WWE Network, which is the historical kind of pay-per-view business. They had run that in-house until 2021 when they licensed that out to Peacock. So the media rights business, those types of programming are the main

driver of the business. You've also got live events. So this is where they tour around and you can actually go to the event like you would go to a baseball game, that sort of thing. about, um, 13% of revenue, um, in 2019 and 5% of it. Essentially the way I think about the live events side of the business, it's almost marketing. So, you know, if you want to go back to the, um, to the superhero analogy, right, what really pays the bills or what gets you to buy the comic book is when Spider-Man fights the green goblin, but there's lots of pages in that comic book where he's out fighting the guy who like stole someone's purse on the street. That's kind of what I think about for the live events businesses. You have, you know, if you're a kid,

you can go see these superheroes in your town, live and in person. And that's really what kind of the live events business offers. It's kind of a marketing side of the business that pays for itself. And in addition to that, the third segment that you look at is consumer products and merchandise in the same way with, you know, you go to the baseball game and you buy the jersey, same thing with WWE, massive kind of t-shirt business is about 9% of revenue and 15% of So, you know, kind of looking at the main drivers of the business and profitability as an investor, the main driver of the company is media rights. And so the way you're going to make money is a couple of ways. So, number one, increasing rights fees for the existing media rights.

So the current deal for Monday Night Raw and Smackdown was renegotiated. It went into place in October 2019. Rights fees increased 3.6x versus the prior levels whenever that deal kind of went into place. You look at in 2021, I mentioned WWE Network, they licensed that out to Peacock. That deal's rumored at $200 million a year. And if you look out this year here in 22, WWE is in the process of running that similar WWE Network playbook, and not just in the US, but across the world. So they sold some rights in Southeast Asia to a Disney subsidiary.

That's really the story today is increasing rights fees on the existing programming, both kind of SmackDown and WWE Network and also expanding the scope of content the company creates. So they're moving into, they've got reality shows. So they have Miz and Mrs. on the USA Network. They got Total Bellas on E! They have sitcoms. So you've got Young Rock is now a sitcom on NBC that WWE is executive producers of. You've got biographies. So A&E brought back their Biography Programming in 2021. Some of their highest programming was made in concert with WWE. They signed an exclusive podcast arrangement with Spotify in 2021, Spotify and The Ringer. You've also got the video games. They're in their last year of their deal with Take-Two to produce

the WWE video game. Lots of different arenas for content. The last one I'll mention is interesting is they have a docu-series about Vince McMahon and the history of WWE moving to Netflix. Lots of tailwinds behind the existing content, increasing rights fees, but also the ability to sell lots and lots and lots of additional, I guess, adjacent content as well, which is a big growing opportunity for the company. The reality shows doesn't really strike me as the logical next step when I think WWE, but it sounds- No, I think, Ryan, you're exposing how you don't know much about WWE.

Apparently. That is the logical next step because that brings me to this next question, which is So WWE kind of borders the line between sports league and entertainment. What are, for anyone that doesn't know, what are the similarities and differences between something maybe like the NFL, MLB, NBA, or Formula One, UFC, all that stuff? Sure. So similarities are in the sense that you have live programming that they, you have to tune in live to really get the value of viewing the event as compared to, you know,

the office, you can watch infinite reruns, right? WWE Raw reruns don't have the same type of value in the same way that sporting events do. Similarly, there's a whole lot of kind of adjacencies and licensing opportunities, whether that's selling jerseys or stadium sponsorship, those sorts of things. WWE has done a lot of stuff with integrating things like they did a special integration with the Red Notice Netflix show where you had some like special part of the production where you have integration there.

So there's lots of licensing and IP opportunities. But some some big, important differences that are, I think, in WWE's favor as compared to kind of traditional sports leagues. One, it's year round. There's no offseason. Right. So you don't just have while the season is going on, your audience engaged, you have your audience engaged year round. Now, of course, there's going to be more engagement around WrestleMania season in the same way that there's more engagement in football around Super Bowl season. But you have 52 weeks a year of content. Another big difference is when you look at who owns the IP and who you're dealing with when you want to make these marketing relationships or advertising relationships, or if you just want to use their kind of clips in kind of digital content, that sort of thing. In the MLB, you're dealing with 30 plus different owners of individual teams. In the NFL, you're dealing with a similar number, soccer, that sort of thing.

In WWE, you're dealing with one company, dealing with one company that is majority controlled by one guy. So it makes things a lot more simple when it comes to licensing out content as compared to dealing with some of these other leagues. And there's also just less conflict, right, about who owns what. What does the MLB own versus what do the Yankees own? That sort of thing. It's really just one company, one franchise. guys. And then last thing is, you know, spoiler alert, it's scripted. They know what's going to happen. So it really helps you when it comes to creating stars in the industry, right? You don't have to wait for Conor McGregor to show up for your sport to really explode. You get to kind of pick huge, huge stars and you can pick folks outside of wrestling to try to engage those audiences. So you can look at WrestleMania this year, right? If you want to engage UFC fans, You have Ronda Rousey and Brock Lesnar are both were both headliners at WrestleMania.

If you want to engage WWE fans that maybe watched the 90s, they don't watch today. You've got Stone Cold, Steve Austin and Edge both made big appearances there. And then if you want to deal with people who don't watch sports or wrestling at all, you had Logan Paul and Johnny Knoxville wrestling on the main card. So you're able to attach and specifically target audiences in a way that you can't do with traditional sports leagues. Last thing I'll say, too, if you look at if you look at engagement, WWE gets more engagement. So there were some headlines came out. Convivo, which is an analytics firm, put some some data out in the past couple of weeks. A two night WrestleMania weekend got two point two billion impressions across social media platforms as compared to one point eight billion for the Super Bowl. If you look at platforms like YouTube, WWE is one of the top 10 biggest YouTube channels in the world.

the largest one in sports. If you look at Facebook, they have the largest Facebook channel page in sports. If you look at TikTok, largest TikTok page in sports. So lots of engagement. You could argue there's more engagement on the WWE content than there is on some of these traditional sports content when you look across all platforms, not just TV, that sort of thing. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one. So you don't have to worry about malware.

Or when your kid downloads a song from a shady link. And now all your computer can play is... Red color, red color, where are 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. That leads into this next question,

And I think the big thing that people think about, you mentioned you got into it because of The Rock and so-called Steve Austin in the 90s. But people kind of think about that. Okay, what's the risk there? Talent is super key for this league or entertainment system. What are the risks of losing top wrestlers to retirement? Or like you mentioned, do they just have kind of that creative funnel of new wrestlers able to come in? But I honestly think personally, I feel like that's a big risk because you don't know if that person is new, if they're going to land with a certain audience that they want. Sure. So thinking about this question, the analogy that comes to mind for me, so I talk about the Marvel analogy when it comes to this kind of content universe.

You build these characters that you can kind of sell merchandise and kind of other other shows off of. I think when you think about the talent part, the comparison that comes to mind for me is like Saturday Night Live. So you think about Saturday Night Live as a live show built around segments where people come on and kind of do their thing and get off the show. Saturday Night Live also does very well on YouTube. So there's some similarities when you think about how the program is. And also they've ran for a similar period of time. But Saturday Night Live, we always have this conversation of like, how are you going to replace Dan Aykroyd and John Belushi? How are you going to replace Eddie Murphy?

How are you going to replace whatever, Adam Sandler, Norm MacDonald, those sorts of things? How are you going to replace Tina Fey? I think you have the same kind of pattern in wrestling. So if you were in the 90s, looking back to the 80s, you would say, how are we going to replace Andre the Giant and Hulk Hogan? If you were in the 2000s, looking back to the late 90s, you'd be saying, how do we replace Stone Cold Steve Austin and The Rock? Today, you're saying, how do you replace John Cena?

I think it's the nature of this type of art form or this type of entertainment is that when you have an ensemble type cast, there's going to be kind of peaks and valleys to the business. Um, so I, I think you could have, you could have asked this same question for the past 20 plus years, both in WWE and, and in the kind of SNL area. Um, but, uh, you know, should we be concerned about talent? One, I think in the near term, there's lots of ability to bring folks back. We just saw, um, we just saw Stone Cold Steve Austin again, come back and headline WrestleMania

and draw significant, um, audiences. There's lots of ability to kind of draw from the existing kind of superstar base. Um, another thing that I think is worth noting is this is a family business. So, you know, the rock was the biggest star 20 years ago, the biggest star in WWE, the unified grand champion, um, is Roman Reigns, who's the rock's cousin in real life. And there has been lots and lots and lots of teases made, um, that if you look at WrestleMania next year, um, we could see Roman Reigns versus the rock at WrestleMania in, um, it's in Los Angeles, which is the same place where the Superbowl was held this year, where the rock

came out and did a promo. So I think there's lots of ability kind of within kind of existing family relationships to bring new audiences. You see Cody Rhodes is also a significant, they just brought Cody Rhodes in from AEW and he's one of the biggest stars in WWE today. He is part of this kind of family dynasty. So I think that there's some of these existing relationships you can tap into. But the other thing that I think is interesting as well is so WWE historically has had lots of these kind of family relationships to draw from. The new way that they're kind of looking to, I guess, access talent is one of the big regulatory changes, I guess, that we had in 2021 was in college sports. You had name, image, and likeness rules open up that allows brands to sign deals with amateur athletes to get access to the name, image, and likeness.

And so WWE has launched their next in line program where they're going to form name, image and likeness relationships with significant college athletes to kind of groom these folks to be the potential next generation of WWE stars. The biggest and most high profile example of that right now is Gable Steveson, who has just won the gold medal in wrestling at the Olympics and appeared at WrestleMania, kind of following a similar pattern of what you saw with Kurt Angle 20 years ago, where he won the gold medal at the Atlanta Olympics, then became a huge star in wrestling. I think there's lots of opportunities with this name, image and likeness relationships to to kind of bring existing athletes into the fold and kind of open up a new a new pipeline for talent. So that's another area where you see potential. You think about it for like a track runner or, you know, a weightlifter or a wrestler. There's really not a lot of outlets for those talents after you kind of finish with amateur amateur sports at the college level. And WWE is going to give folks, you know, a significant outlet to make big money. I think that, you know, the lowest Triple H, Paul Levesque, who is a significant executive at WWE, was interviewed pretty recently, said something like the bottom of the WWE roster is making something like a quarter million dollars a year.

So this is, you know, big business compared to what your alternatives might be, you know, leaving from college wrestling, going into into the real world. So that's another potential pipeline for talent. What are WWE's costs? Is it primarily paying talent? I guess, what do the economics look like? Sure. So the most profitable segment of the business is the media rights side of the business. So in 2019, you're looking at 30% EBITDA margins. That's their kind of EBITDA figure they use. that's expanded significantly. I think it's over, over a thousand basis points, um, in 2021. Um, uh, so, uh, so, so that, that's really where your most profitable segment, you have similar, um, profit margins on the, on the, the, the merchandising segment of the business t-shirts,

that sort of thing. However, um, that's a little bit up in the air. Cause just like, I think in the past two or three weeks, they signed a deal with Fanatics, which is across, apparel, NFTs, trading cards, all those sorts of things where they're going to outsource the apparel side of the business. And so they're not going to carry those costs anymore. They're licensing that out to a third party that will produce the content. But so the main costs for the business are production, right? You have a live show that runs every week, all year long, that travels all across the world. They travel to Saudi Arabia, UK, all across the US. And it's a really, really significant production. So that's why you saw

in 2020 and 2021, you cut out a whole lot of cost out of the business because you didn't have to take that show on the road anymore. They were just in their performance center. So the highest margin part of the business is the licensing part. The costs there are relatively fixed over time. you're putting on the same show as those fees increase, you see margins expand in a significant way, which is again, why you saw that, that big margin expansion. I kind of cited to start off. Yeah. You might not have the answer to this one, I guess, but like, what do the what does the talent make?

Like what does an individual make an income? That's maybe one of the big stars for WWE. Is it like in, in are we talking like millions, tens of millions? What does it look like? Yeah, it's in the millions range. I mean, the numbers aren't public in the same way that you would have it for like a baseball player or that sort of thing. But these are these are big, chunky. I mean, think about what UFC fighters make. I think you'd be in a similar in a similar ballpark and actually have a similar conversation. Right. If UFC gets criticized a lot for not paying their fighters enough, even though, again, you have this quarter million dollars low end salary and UFC has a similar kind of setup there. So, you know, talent costs are a portion. But again, you think about it, too. Where's the market, the top end market for wrestling talent? It's really WWE and then AEW, which is the kind of upstart challenger. It's funded by Tony Khan, which is part of the Khan family that owns the Jaguars. That sort of thing. There's only really two bidders out there for wrestling talent.

So, you know, I think it's a little bit less of a competitive market than it might be in sports that have been kind of traditional sports. Okay. And the live events business obviously grew pretty fast in 2021, especially comped against 2020. How big do you think that can be as a percentage of the business moving forward? Will it be, you said, I think it's at 13% of overall revenue. Do you see that being a larger chunk? Well, yeah. So that's the 2019 numbers. Obviously, if you look at 21 and 20, those numbers are lower as a percentage of overall revenue, right? Because 2020, all events were canceled.

And then 2021, you only swallowed up kind of the back half of the year. So if you just want to extrapolate out to we only got half a year of live events revenue in 21, and we're going to get a full year in 2022, that's a pretty quick route to a double. Part of that, you know, kind of just returning to trend. And part of that is, in 2020, they missed all of their Saudi Arabia events. And in 2021, they only got one of the two. And those events are somewhere in the range of $40 to $50 million per event. There's been some speculation, if you listen to the earnings call, Nick Kahn has said that they may try to get three events, three Saudi Arabian events in

2022. If that's the case, then not only do you return to trend, but you also throw in another $35, $40 million of revenue on top. So I think that there's room for upside there on live events. The other thing that's interesting is just in the past week or so, they announced that they're going to hold a stadium event in the UK, which is their first kind of big major pay-per-view event in the UK in 30 years. And they had more claims for that in the first couple of days than they saw for WrestleMania. So there's lots of demand for events and lots of ability to do kind of larger events outside the U.S. They've talked about, you know, has talked about moving away

from arena events to doing more kind of stadium size events. So, you know, Super Bowls at SoFi Stadium, again, this U.K. event is going to be a stadium event. So there is potential not only kind of for events to return, but also for these larger events for them to be larger, you know, duh. But for things like, you know, SummerSlam and things like that, moving from an arena to stadium, making those events bigger. So I think you're going to return to trend and maybe even a little bit, a little bit more on the live event side. But again, that's not, I mean, money is money. It's great. It's great to make money, but the real driver of the business, the real kind of area where you're going to see, you know, significant profit increases is going to be on

the rights, the media rights fees. So we talked about in, you know, the story in 2020 was that you had the new, um, Ron Smackdown rights, rights fees kick in, uh, the story in 20 and 21 was that you had, uh, WWE licensed the network to Peacock. So basically got out of the direct to consumer business, um, in the U S I think the story here, um, in 22 is going to be getting out of that direct to consumer business on a global basis. They signed a deal. I think I mentioned earlier a deal in Southeast Asia with Disney. I think you're going to see lots of those types of deals, signed across the world at a higher rate than what they had been getting previously

and also at lower costs because you no longer have to host video in-house, that sort of thing. So you strip some costs out and also you get a bigger audience too. One thing that's worth noting with the Peacock deal is you had 1.5 million subscribers in the US to WWE Network. And if you look at the numbers through 21 on Peacock

is you had three and a half million people engaged with WWE content. So you've got people engaging on the platform more than double. You've got the cost that it costs the company to reach them going down and you have the amount they're getting paid to send it out going up. That's obviously good for the business. The other thing that you'll see this year is the second day rights for Raw and SmackDown. So if you want to go back and watch it the second day, Hulu holds those rights today. Those are going to be up for resale here in 22. And so you'll expect those to come up

up for negotiation. And then they've got, hold on, I've got it in my notes here. The company has over a dozen scripted and unscripted projects sold based on WWIP that we have up for sale this year. So there's lots of potential to, again, continue to sell more content, like The Undertaker is coming out with a podcast, that sort of thing. And so that's really where you're going to see more revenue being driven in the near term. And also, this year, we're going to get a full year of that Peacock impact on earnings because the Peacock transition didn't happen until WrestleMania season last year. And if you kind of read the tea leaves of the company, the revenue recognition on the Peacock deal is lumpy, kind of built around the WrestleMania

a part of the year. So you'll see higher rights fees pull through on the Peacock deal this year, and you also have lots of new, both new content the company is selling and the ability to run a similar playbook to what they ran in the US abroad. And then before you know it, we'll be looking out that raw and smack deal that I mentioned that was up 3.6x versus the previous rate. That kicked in in October, 2019, it was a five-year deal. Um, so that means it's going to end in October, 2024, which means you're probably looking mid 2023 next year when you maybe see some headlines leaking out about, uh, what the new rates could be, um, for, uh, for raw and SmackDown. And again, that's coming after what I think is going to be probably the biggest WrestleMania

ever, because there's lots and lots of signs out there, um, that the rock is going to come back. So if that's the case, then there should be lots and lots of upside for rights fees coming into, you know, in the next year or so. And also, again, I mentioned that they licensed out the merchandise business. So in theory, you should see the merchandise business revenue go up and their costs go down because they outsourced it. So I think there's lots of room, again, to just squeeze more money out of their existing media rights and then to just add more, you know, fuel to the fire when it comes to new content. This episode is brought to you by State Farm. There are some monthly expenses you just can't get away from, like insurance. You might be looking at your expenses thinking you're going to have to pause on your DIY project, stop collecting vinyl, or even give up your daily coffee fix to have great insurance. Talk about a nightmare. It's a good thing State Farm knows everyone has a budget and they have a range of options,

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direct competitor but who does wwe really compete with because is it just trying to get as many people to switch it on like saying a monday night raw or watching the replays or whatever it are the are is it generally just competing for people's time yeah i mean it's it's it's an entertainment business. I think you think of it as a TV show. So, you know, the companies that it might be competing with would be like the discoveries of the world and the other sports leagues and things like that. I mean, YouTube, again, I mean, I wouldn't say WWE is competing with YouTube. WWE is a significant player on YouTube, but just other kind of avenues for people's time. How has the transition from linear TV to connected TV impacted WWE? I know you kind

of touched on some of the deals they've signed. Have they been a beneficiary of that or has it hurt them at all? Yeah. So I would say that they're a beneficiary. So across the board, what all these streaming companies are trying to do is they're trying to get as many eyeballs as they possibly can onto their platforms. We're definitely at a land grab when it comes to streaming. You got lots of these, you know, whether it's Peacock or Netflix or Apple is now trying to get into the sports game. Apple's got is doing baseball rights and there's rumors that Apple is going to go get NFL Sunday ticket. All of these platforms are looking for content that will bring an audience along with it and will keep people engaged on the platform. And so that's part

why you've seen sports rights increase the way they have. I mean, if you look across the board, ratings are going down, but what companies are willing to pay to get access to those audiences are going up. And WWE is in that same type of bucket as sports league. So if you go by, when Peacock went and made the deal with WWE, they got access to an audience of people that will follow that brand wherever they go, that need to tune in and see WrestleMania when it's live or that sort of thing. So that's really what WWE is offering. All those numbers that I listed out earlier about the size of their audience. They're an arms dealer to these various streaming properties. And so, I think they're in a good spot because I think it's fair to say 10 years

from now, there's not going to be as many streamers competing as there are today. And those streamers want content that make them must have. And WWE for a certain subset of people is that type of content. Right. So, there wasn't an ESPN Plus 10 years ago that might be willing to pay up to get more and more people onto that service and wwe could get them what is say i mean they're with peacock now but say i don't know five years down the line wwe could get them three million new subscribers right away something like that yeah that's essentially the exchange um that you're looking at is the wwe offers access to that audience and folks are trying to pay um to get access to that i mean that's kind of what what it would have been in the past um on tv as

well why are you paying for rights to monday night raw because you want people to tune in and watch Monday Night Raw and look at your ads and those sorts of things. And I think it's an important part of the thesis for the company because I think one of the potential outs that you have as a shareholder is that the company gets acquired. There's some signals that that may happen. They've really kind of trimmed a whole lot of fat when it comes to the talent on the roster. You've also got significant amounts of money getting put into a new headquarters that will be done at the end of 2022. And it's my suspicion that when that new headquarters is done at the end of 2022, and they have this huge WrestleMania in 2023, and we reach the period

where it's about time to renegotiate those rights deals, it would be an apt time for the company to maybe sell to one of these streamers, maybe Peacock, one of these others. Vince McMahon is pushing 80 years old, so it'd be a natural time for him to exit. And if you look at private market valuations. UFC in 2016, Endeavor bought half of the company for $3.8 billion at about seven times gross revenue. WWE today is something like $4.3 billion. So if you think WWE is worth at least as much as UFC was in 2016, there's basically no downside to the stock price today. If you want to value it at the same revenue multiple that UFC was valued at, which was something like seven times gross revenue. That puts WWE's valuation today at that multiple at $7 to $10

billion. So again, that's like 50% upside if you just want to go off private market. And again, I think there's lots of reasons to believe that costs are coming down, both from outsourcing the network, outsourcing, merchandising, finishing the headquarters, that sort of thing, and revenue going up. There's lots of reasons to believe the company is going to be more strong going forward. But if the market doesn't, the private market will still pay you. And that's why I think it's an interesting investment possibility today because there's lots of stories that you can tell about upside for the business, whether it's moving to stadium events or this next kind of rights deal. If we see another triple in rights fees or opportunities to,

again, sell more merchandise, they sign an NFT deal with Fanatics. They have an NFT partnership partnership with Fox, all these other opportunities to license their merchandise. Again, if you look at the company, whether it's for Saudi Arabia events too, and then you go back and look at the company and it's trading at what I would say is below where it should go in the private market. So there's an upside story to tell and there's not much of a downside story to tell. What does growth look like for them? Can you maybe put some numbers on it just to contextualize it?

Have they been growing the top line? It sounds like they have, but just to maybe get some context. Yeah, absolutely. So, yeah. And if you give me one second, I can pull up my notes here too. But yeah, I mean, 2021 was a record year for earnings and OEBDA. 2020, excuse me, 2021 was a record year. 2022, they're projecting another record as well.

So, hold on. give you i'll give you the exact numbers just give me give me a second to pull up my uh is it is it typically i'll let you pull them up but like in my mind it's maybe a little lumpy is like growth would that be right or is it maybe more uh since it's a year round i guess and i know 2020 is kind of a blip of a year but uh i guess yeah just what does growth look like Yeah. The main driver of growth is these rights deals. You had this big increase. For example, when they negotiated the new Raw and Smackdown rights deals a couple of years ago that went into effect in 2019, you had rights fees. It was 3.6x versus the previous rate. They were going

to get paid at this rate on this negotiated deal for five years. Then we'll see another big, huge, likely lumpy increase in revenue. So, you know, as far as the main drivers of the business, which is this, which is the media rights deals, that's going to be, the increases in it are going to be lumpy based on those contracts. You said it was around $4.3 billion was the valuation today. What are they kind of just, what are they earning? So maybe there's, like, I guess what's the multiple so people have an idea? Yeah. So right now we're somewhere in the range of like 14 times the OEBDA numbers. We're in the range of kind of Forex revenue. Yeah. And you're projecting a 10 to 15% increase in OEBDA in 2022 off of those 21 numbers as you return back to, again, full scale live events, the full effects of the Peacock deal, those sorts of things. So you're going to see another 10 to 15 percent increase in their kind of operating earnings metric here in 20 and 21 and excuse me, in 22.

And then again, part of the lumpiness, too, is on the cash flow production. So CapEx here in 22 is projected at 280 to 310 million dollars, 230 to 255 million dollars of that is the headquarters. So you're going to have a little bit understated cash flow generation here in 22 as they finish up the headquarters production. So that's another thing to think about as well. That's weighing on the amount of cash flow that the company can produce, but still increasing earnings. Right. And we mentioned valuation a bit. Anything else, any other metrics on that that people should know about? Or is it just really revenue or cash flow?

that's pretty much it i mean i would also say um you could also just look uh the company so i mentioned um you know the big transition of the business model really started at the end of of january uh 2020 um when you had the transition in ownership and you had the um um you know nikon end up being brought in the company's a way way way better business today you've stripped out a whole bunch of costs you've outsourced um you've outsourced a decent chunk um of the kind of consumer side of the business. And you're down way, way, way significantly from where it was a number of years ago. So I don't know why the market is not particularly excited about the business, but the quality of the business has increased significantly the past several years

and will increase going forward. Last thing I'll say too, and this is just like a common sense thing. So I mentioned Nick Kahn, president of the company, chief revenue officer, previously had been WWE's agent at CAA, had been the one who negotiated those new Raw and SmackDown rights deals, all those sorts of things. Sports agents, they have a reputation for wanting to make money. And for that being a very significant motivation for why they joined the company, I think it's telling that he joined the business and is kind of running the business still today. And I think, again, given that the entire thesis around the business that I'm telling you today is that you can squeeze more and more value out of those existing rights

deals, the fact that you have somebody like that who is highly financially motivated that is running the show, I think gives me a little bit of solace as well. Yeah. It's interesting. They're still in a transition period. I hadn't really kind of forgot about that. But last thing before we get to the final question, they're buying back stock seems pretty rapidly and run really the numbers. What are your thoughts on that? Is that a positive signal for you on their new management's ability to return capital to shareholders? Just thoughts on the buyback in general. And do they have a dividend. I forget. Yeah, they do have a dividend and the dividend has been a significant use of cash. Yeah. So if you look back the last several years, they've bought back something like

4% of the stock. I mean, I think the company is cheap. And again, there's not like outside of this headquarters, there's really not a lot of capital needs for the business. And you could argue the headquarters is not really a capital need for the business anyway. It's more of a kind of a vanity project. So I think the buybacks are accretive. But again, the main driver for me of the business are that the rights fees are going up. The rights fees are going up and the costs are going down. And it's valued at what I would say is significantly below where the company would go in the private market. And so if you put those things together, it's just hard for me to figure out how you lose money on this. And there's lots of ways I can tell you that you're going to make

money or that the business can improve in quality over the next couple of years. All right. Buybacks are a nice little cherry on top. Sorry, I need one more. You said not a lot of ways that this could go wrong. If it were to go wrong, what would be, I guess, the driver of that? Yeah. I mean, so if for some reason the kind of willingness to pay up for sports rights were

to kind of evaporate from the market, if folks were to place a lower valuation on these types of audiences, that would negatively affect WWE. I mentioned earlier Saudi Arabia. If you look at the live events part of the business, every one of those events is something like $40 million per event. If there were to be some type of issue that prevented them from going to that market, then that could significantly impact earnings power for the business. Um, you know, there's folks that talk about, uh, attendance at some of the, the, so like the non, um, kind of raw and SmackDown live events. So they call them house shows.

Those, those have been trailing down over time. There's folks that will tell you that, that, um, that's a signal to the, the, the business quality, um, is deteriorating. As I've said earlier, I think for me, um, these are almost like marketing that pays for themselves, um, these events. So it's not a big concern for me, but there will be people that tell you that that's a sign that the kind of core, highly engaged audiences is kind of dissolving over time. And so that's a that's a potential risk as well. And then maybe the last one is AEW. So there's competition that has come on for WWE from, I guess, the early 2000s all the way until three, four years ago, basically faced no competition, at least on the for the top end, highest talent of wrestlers.

Now you have AEW that is competing, and they signed CM Punk, which is probably the biggest free agent signing in wrestling history in a long period of time. They've signed some big WWE stars like Daniel Bryan, now known as Bryan Danielson. So there's some competition for talent. I think for my part, again, if you look at AEW ratings, even despite all those significant signings, they're still trailing WWE in a significant way and still has a lot, lot, lot of ways to go to monetize their content before they're a meaningful competitor. But you could tell a story about AEW

kind of sapping away some of that core engaged wrestling fan audience and that there's not enough kind of casual fan audience there left for the business. Again, I don't think that's super likely, especially again, if you look at some of those social media metrics

when it comes to fan engagement, but that is a risk. I mean, maybe if I just want to go way out there, WWE wrestlers aren't unionized, but folks in MLB and NBA and all those other places are. So, you know, they haven't unionized yet. Maybe they will in the future, but you could tell a story about some type of labor unrest that could be a risk for that business. Again, I don't think that's likely, but it could happen. I think that's all the questions we have. Do you have any more?

Okay. Okay. Well, that's going to do it for any listeners that want to follow along with you. What's the best place to do that? I imagine it's Twitter, but you also write, do you still write for any, is it just Fool members now or? Yeah. Yeah. So you can find me at investingmick on Twitter. Yeah. And I also work for across the Motley Fool Canada suite of services. So Stock Advisor Canada, Hidden Gems Canada, Dividend Investor Canada

Rule Breakers Canada The whole The whole Motley Fool Canada Family of services I write there And then from time to time I'll appear on the

On the Motley Fool podcast And Motley Fool Live So you know If you're a Fool member Especially in the Canadian world You can find me And if not

Just you know Reach out to me on Twitter Happy to talk to you About WWE Or nuclear energy Or any of that Other fun stuff All right perfect

Well that's going to do it Brett and I Want to remind our listeners That we are not Financial advisors Anything we say or discuss here on Chit Chat Money is not formal advice or a recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast.

Thank you all for listening. We'll see you next time.