Shares of sports media and entertainment company World Wrestling Entertainment (NYSE:WWE) were the hottest thing on Wall Street in 2018. In 2019, WWE stock turned into the coldest thing on Wall Street, and it doesn’t look like it’s going to thaw in 2020.
In 2018, shares of World Wrestling Entertainment rose nearly 150%, while the S&P 500 dropped 6%. The following year, WWE stock cratered almost 15%, while the market rose about 30%. Year-to-date, the market’s up 4%. World Wresting Entertainment stock is down more than 28%.
How did a stock once so hot get so cold, so quickly? More importantly, will this cold streak last, or is this an opportunity to buy the dip in a beaten-up name?
In short, the stock fell because hope regarding the company’s streaming upside potential and international expansion in 2018, turned into fears surrounding the platform’s declining domestic popularity and international expansion fumbles in 2019. While these headwinds won’t last forever, they will stick around for the foreseeable future. And the stock still isn’t cheap in the face of these headwinds.
I don’t think it’s time to buy the dip just yet. Instead, I’d wait for shares to get cheaper and for declining domestic viewership trends to reverse course.
WWE Has Problems
In the big picture, WWE has some fundamental problems which will likely persist and continue to weigh on the company’s growth trajectory.
Those problems largely center around declining domestic viewership and international expansion troubles. On the domestic front, WWE fans are losing interest for a number of reasons, ranging from the fact that there’s simply too much content to consume to keep up with the narrative, to increasing competition from UFC to cord-cutting. Management also took some missteps in trying to launch its own streaming platform (which hasn’t quite worked out) and incorrectly marketing a few events.
On the international front, the company was flying high in 2018 on optimism surrounding its huge untapped opportunity outside of the U.S. Thus far, reality hasn’t lived up to expectations. International subscriber, viewership, and attendance growth trends are weak, for many of the same reasons that domestic engagement trends are weak.
In a nutshell, WWE seems to be rapidly losing popularity across the globe.
Sure, there are potential tailwinds in the pipeline which could help stem this popularity erosion. That includes content distribution deals in the Middle East and India, as well as the sale of streaming content rights to a third-party streaming service provider. But, as management said on the recent earnings call, these potential tailwinds are “subject to considerable uncertainty.”
Broadly, then, WWE’s growth narrative is presently depressed, with limited clarity to things getting better in 2020. That’s not exactly a recipe for success.
The Stock Isn’t Cheap
Even though the growth narrative is depressed, WEE has enough clarity to long term sustainable growth — demand for wrestling entertainment and media isn’t going anywhere anytime soon — that I would buy the dip here if the stock was cheap enough.
But it’s not. Shares are still richly valued.
Look at the numbers. Revenues are expected to jump about 20% this year due to new content deals in the U.S. Thereafter, revenue growth is projected to run the 4% to 5% range. That is consistent with broader growth across the entire global ad industry. Profit margins should expand, but not by much given that mid- single-digit revenue growth doesn’t allow much room for positive operating leverage.
You’re talking about a high single-digit to low double-digit profit grower here.
Yet, with 2020 profit estimates sitting at $1.75 per share, the stock is trading at 26-times forward earnings. That’s not cheap. It’s especially not cheap for high single-digit to low double-digit profit growth potential. Nor is it cheap for a company with sizable growth risks.
As such, shares simply aren’t cheap enough yet to warrant buying the dip, especially considering the growth risks on the horizon.
Bottom Line on WWE Stock
If shares were cheaper, I’d be buying the dip. But, they aren’t cheap enough yet to warrant betting on a turnaround. So, I’m waiting for one of two things to happen here. Either shares fall below $40 and the valuation starts to look compelling. Or, viewership trends start to reverse course and the stock starts to get some upward momentum.
Until then, I’ll wait on the sidelines.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
