WWE: Suspending Disbelief

Despite talent injuries and waning engagement, WWE is setting the stage for a brighter future
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Nowhere is the concept of suspension of disbelief -- that literary and cinematic trope that allows you to enjoy superhero movies and Disney films without getting bogged down by the fact that people can’t fly and toys don’t talk -- more evident in the TV world than in the WWE. And though fans of the Undertaker and Triple H have longed reconciled themselves with the impossible physics of the Chokeslam or the Piledriver, opting to just sit back and enjoy the ride, WWE investors are being asked to do the same thing.

WWE stock has been on a rollercoaster ride in the past two weeks, dropping 17% ($16.62) between April 23 and May 1 from $99.25 each to $82.63 per share, mainly because of some disappointing Q1 results. The stock has climbed back a bit since then -- it was priced at $85.60 per share on May 2-- but WWE missed pretty much every target in the quarter, and investors were understandably wary. Domestic ratings for its Raw and SmackDown shows declined 14% and 13%, respectively, and average attendance at its North American events dipped 11%. That translated into a revenue decline of 3% to $187.7 million and adjusted OIBDA plunged 65% to $12.4 million.

WWE explained on a conference call with analysts on April 25 that the main reason for the decline was an unprecedented string of injuries to talent -- 15 performers were out of commission during the quarter. Now those wrestlers are back in action -- including Roman Reigns and AJ Styles -- which should have a positive impact on ratings. But investors were more concerned about what they didn’t hear on the call -- like the full story on its Q2 guidance and cadence for Q3 and Q4 -- and that may have had a big impact on the stock.

For the most part, analysts that follow the company argued that yes, WWE content needs to get better, and the company said that it has hired new writers and is coming up with new story lines. But they also reminded investors that WWE has been in a transformative mode for the past several years, and has made huge strides in that arena.

In a note to clients, BTIG analyst Brandon Ross added that while WWE’s content woes were blamed on injuries in Q1, the decline really started in Q3, when weakness in engagement metrics first started to surface.

Ross said he took a “holistic approach” to the earlier declines, especially since engagement for WWE’s AVOD platforms was on the rise.

A.J. Styles

A.J. Styles

“However, after the performance in Q1 2019, which included a first time sequential decline in online video consumption, it is clear that the content is not resonating with the fanbase,” Ross wrote in his note. “The company has pointed to a number of Superstar absentees in 2019, which has included Roman Reigns’ illness and injuries to other top stars such as Seth Rollins and A.J. Styles, but there is likely more to it. Vince McMahon himself told us in Q3 that the live show needed a remake, and on Thursday’s [April 25] earnings call spoke to the hiring of new writers and a new live events team to help out.”

Roman Reigns

Roman Reigns

Ross wrote that investors should look to 2019 as the year WWE shifted from being a company that was “directly reliant on swings in its creative to one with years of visibility and the ability to ride through content cycles.” A key metric for WWE’s cash flow growth over the next several years will be the outcome of its international licenses for Raw and SmackDown, which should be revealed in the next few months. Ross is bullish on those deals.

“What is less understood by investors is that WWE has also gone through a strategic evolution with an eye towards 2020 and beyond,” Ross wrote. “When 2020 begins, WWE will be positioned to reach more global consumers than ever before, understand those consumers and monetize them. The infrastructure is either in place or planned, from a broadcast partner motivated to promote the brand in the U.S. to an OTT network in local languages and currencies.”

Ross noted that the bottom line still lies in WWE’s immensely loyal fanbase. And the addition of WWE programming on Fox -- where SmackDown will debut Oc., 4 -- is expected to be a huge lift for the brand.

“We cannot overstate the impact we believe this will have on the company’s domestic fanbase,” Ross wrote.

Wolfe Research managing director Marci Ryvicker estimated in a research note that the Fox deal will put WWE in 30% more homes, and the addition of the content -- especially since the distributor lost UFC’s Mixed Martial Arts programming to ESPN -- will be integral to the broadcaster's success. 

Fox is expected to provide more information on its overall strategy at a scheduled Investor Day meeting on May 9, but Ross wrote that it is pretty apparent that WWE is an important part of their plans.

“Strong SmackDown ratings would give Fox another megaphone to promote its general entertainment programming,” Ross wrote. “We believe Fox will be creative about promoting WWE across its properties, especially NFL broadcasts (integration into halftime shows etc) and even Fox News.”

Ryvicker, in her note to clients said while details are sketchy, the Fox deal could mean another $50 million revenue opportunity for WWE and could have beneficial effects on other WWE properties.

“Further, we think the promotion from Fox will likely carry-over to USA’s ratings on Tuesday’s as well,” Ryvicker wrote. “All in all, this is good for future engagement and potentially subs.”

Morgan Stanley media analyst Ben Swinburne was equally encouraged by the Fox deal, adding in a research note that although there is work ahead to reverse the ratings softness, “giant license fees from Fox and NBC await in 4Q19 and beyond.”

So, the WWE saga could turn out like a lot of its past wrestling story lines -- the seemingly defeated hero, literally on the ropes, gets a last minute assist from a tag team member, or the cheering of the crowd, or some inner voice to tap that extra 110% of effort needed to come out the winner. For wrestling fans, it's something they have seen almost on a weekly basis. All it takes is a little faith, or some suspended disbelief.  

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