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3 Reasons Why World Wrestling Entertainment, Inc. Stock Will Suffer a Smack Down

WWE stock - 3 Reasons Why World Wrestling Entertainment, Inc. Stock Will Suffer a Smack Down

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The wrestling is fake, but the profits most certainly are not. Although one of the strangest investments on Wall Street, World Wrestling Entertainment, Inc. (NYSE:WWE) has delivered the goods.

Year-to-date, WWE stock is up a scorching 29%. In comparison, the benchmark SPDR S&P 500 ETF Trust (NYSEARCA:SPY) barely hit parity against the January opener.

Don’t fall into the trap that the only people buying World Wrestling Entertainment stock are devoted “fan boys.” While I personally have yet to find someone who watches WWE on a regular basis, the star power is undeniable.

Pro wrestling has gone mainstream in similar fashion to video games. In other words, being a WWE fan and having a girlfriend are no longer mutually exclusive concepts.

In fact, your girlfriend might be getting her dose of “Raw” and “SmackDown” willingly! Contrary to popular thinking, the WWE has significantly invested in attracting the female demographic, and you can’t criticize the results. Women wrestlers are no longer marginalized as bit players; instead, they play a pivotal role in the wrestling story line.

From an investment perspective, the most important metric is 40%. That’s the female split in terms of television viewership. For a particularly testosterone-fueled industry, this demo is pure gold. It proves that the organization is maximizing its audience reach. And with superstars like Ronda Rousey entering the fray, WWE got a whole lot more interesting!

Again, you can’t argue with the results. In the trailing five years, World Wrestling Entertainment stock is up a staggering 417%. It also has surprisingly good financials, including strong revenue growth and relatively stable cash flow.

This points to a compelling, contrarian opportunity. However, if you’re thinking about buying WWE stock, I’d reconsider for three reasons.

Declining Overall TV Viewership

I just explained that one of the best attributes for World Wrestling Entertainment is its demographic reach. Again, very few testosterone-fueled sports leagues, if you want to call it that, feature a 40% female demo. But the critical knock against the company is the overall viewership.

WWE stock, TV viewership stats
Click to Enlarge
Source: Source: JYE Financial, unless otherwise indicated

In the autumn season of 2011, WWE’s TV viewership was 20.2 million. By the spring of 2017, that figure dropped to 18.7 million, or a 7.5% loss. That’s just not what you want to see from a fringe sports league, which is what it is.

Unlike legitimate sports, pro wrestling lacks compelling drama. You the audience member may not know what’s going on, but the insiders surely do. It just doesn’t have the same appeal as football, baseball, or basketball, or any other real sport in which no one knows what will happen until it happens (sorry, New England Patriots fans!).

Plus, real sports leagues are suffering worrying viewership declines. If the NFL or NASCAR can’t keep its loyal fans on board, I’m staying away from World Wrestling Entertainment stock.

Superstar Injury Risk

If you’re holding WWE stock, you’re more dependent on the company’s superstars than other sporting industries. No matter how much you love Tom Brady, Anheuser Busch Inbev NV (ADR) (NYSE:BUD) will air its Super Bowl commercials, whether he’s playing in it or not.

You can’t say the same thing about WWE wrestling. This is a company that thrives on entertainment, so much so that it’s written into its name! Thus, if its stars go down, so too will those already-declining viewers. And if your superstars are injured, what’s the point of going to the many live events that WWE hosts?

Apparent pro wrestling expert and Forbes contributor Blake Oestriecher argues that several WWE athletes are overworked, leading to potential injuries. With constantly running matches and an inequitable pay scale, Oestriecher believes that the problem will worsen.

I’ll take his word for it. What I do know is that while the entertainment is staged, the wrestlers incur real and sometimes serious injuries.

That’s a major problem because unlike, say, the NFL, the WWE can’t substitute its key participants. WWE is about the story and the characters. Without them, you have a bunch of dudes throwing chairs at each other. Unfortunately, it’s just too much risk to buy into World Wrestling Entertainment stock.

Sports Industries’ Underperformance

As I mentioned at the top, I don’t at all dismiss wrestling’s fan base appeal and the company’s valuation boost. However, if I was lucky and crazy enough to buy WWE stock early, I’d really consider taking some profits at this juncture.

Here’s why: professional sports stocks generally don’t perform that well. A key example is Manchester United PLC (NYSE:MANU). Over the trailing five-year period, MANU returned a whopping 12.7%. Of course, I’m being facetious. These are terribly pedestrian returns where the only comfort is that you didn’t lose money on the deal.

That said, MANU is an opportunity cost. For the time spent on it, you could have picked other viable names. Moreover, it appears that once a sports stock flounders, the drop can be severe.

Consider BCE Inc. (USA) (NYSE:BCE), which owns the Toronto Maple Leafs through its acquisition of Maple Leaf Sports & Entertainment. BCE stock is down 9% YTD and could head lower.

Bottom Line on WWE Stock

Finally, you only have to look at WWE stock to understand the risks. After going parabolic in 2014, the company’s shares quickly cratered. I’m not guaranteeing the same thing will happen at this juncture. However, if you’ve already made wild profits, why take a chance?

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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