If you cover hundreds of companies every year, you’re bound to make some whoppers. Unfortunately, I had one recently in the form of World Wrestling Entertainment, Inc. (NYSE:WWE).
Interspersed with my bearish assessment were jokes I made at the expense of the pro wrestling industry. Unfortunately, the joke was on me as WWE stock skyrocketed 61% since I last wrote about it.
In fairness, the company’s shares were initially getting away from me at a much more reasonable price. However, that was before Twenty-First Century Fox Inc (NASDAQ:FOXA) secured a deal to broadcast SmackDown Live on its network channel.
According to The Hollywood Reporter, the five-year contract is worth more than $1 billion. On the day of the announcement, WWE stock jumped nearly 12%.
Ironically, Comcast Corporation (NASDAQ:CMCSA) decided not to exercise its option to keep “SmackDown Live” on its network. Instead, the media giant opted to keep WWE’s other show, Raw, on Comcast’s USA Network cable channel. Comcast and Walt Disney Co (NYSE:DIS) are locked in heated battle to buy out Fox.
Looking back, I obviously underestimated the draw that World Wrestling Entertainment commands. Primarily, I was worried about the league’s declining TV viewership. I wrote:
“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.”
I later wrote about how pro wrestling “lacks compelling drama.” As a scripted sports league, I openly questioned how WWE could compete with real sports.
While the TV viewership statistics are just plain facts, I was wrong about the lack of drama. To Fox, its worth $1 billion.
Don’t Chase WWE stock
Given how badly I erred on WWE stock, do I now consider it a buy? I concede that the company is on a very impressive run. A part of me doesn’t want to miss out on any future gains. Ultimately, though, I don’t want to chase shares and end up compounding my original mistake.
As I mentioned in my last write-up, WWE stock is not without its tailwinds. For starters, World Wrestling Entertainment features surprisingly good financials. Since fiscal 2014, management has achieved 14% annual revenue growth. Additionally, the company is fiscally disciplined. As evidence, both gross and operating margins increased consecutively over the past four years.
Another aspect I personally found amazing was its 60-40 male-female viewership ratio. You’d think that guys smashing folding chairs on each other’s heads would draw an exclusively male audience. But WWE’s enviously strong marketing to women is an inspiration to other sports leagues.
Plus, with wide-appealing superstars like Ronda Rousey jumping on board, the female audience should only improve from here on out.
So why am I still hesitant on WWE stock? Because sports-related investments usually don’t perform well. Not only that, they’re even more dubious investments moving forward.
Specific sports leagues, such as NASCAR racing, have suffered dwindling audiences over the last few years. But recent data indicates that essentially all sports, even the Olympics, are hurting. So while Fox is willing to make a billion-dollar gamble, that’s not a guarantee it will pay off.
I don’t need to remind anyone that we Americans have no rooting interest in this year’s World Cup. Fox thought that Team USA qualifying for the quadrennial soccer tournament was a sure thing. Sadly, it didn’t turn out that way.
WWE Stock Is Likely Overdue for a Correction
But the biggest reason I don’t want to chase WWE stock is that it’s probably due for a correction. In nearly two-and-a-half years, the pro wrestling league has returned 240% to shareholders. I know far more important companies that aren’t producing these kinds of numbers.
Moreover, you don’t want to hold the bag if WWE stock does experience a sharp correction. Within the first quarter of 2014, shares nearly doubled in value. But two months later, WWE hemorrhaged over 60% in the markets. It took bag-holders almost four years to recover.
Worryingly, World Wrestling Entertainment doesn’t appeal to younger audiences despite being youth-centric. That means the company risks losing relevancy in critical social media platforms unless it does something to address this problem.
Management might have the answers, but at this juncture, I’m not sure that WWE stock is worth taking the chance on. The league competes in a tough business landscape, with the overall sports industry suffering serious ratings declines. If you happened to speculate on WWE before its big jump, congrats! Now it’s time to cash in those chips.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.