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The Clippers Make Social Media Stocks Look Cheap

May 30, 2014 | About:

If Steve Ballmer were still running Microsoft (MSFT) I would dump the stock, questioning his judgment and sanity.

Ballmer just agreed to pay a record $2 billion to the Sterling family for the LA Clippers franchise–a franchise that Forbes estimated to be worth $575 million just this past January.

Let’s take a look at the numbers here. The Clippers brought in about $128 million in revenues last season and generated $15 million in operating income. Calculating a “price/earnings” ratio on the purchase would give you a bubbly 133.

Remember, the Clippers are LA’s “other team.” And the Lakers–LA’s premier basketball team and one of the most storied franchises of any sport anywhere in the world–were estimated by Forbes to be worth “only” $1.4 billion. The New York Knicks were estimated to be worth about $50 million more than the Lakers.

I’ve been watching the sports bubble for a while now. As far back as 2010, I questioned whether the boom in sports stadium building were coming to an end. As I noted then, between 1992 and 2010, well over two thirds of ALL major North American sports venues were replaced: 67% of baseball teams, 69% of football teams, 77% of basketball teams, and a shocking 83.3% of hockey teams got new homes or had their old ones substantially renovated to the point of being virtually new. And the prices paid reached the levels of the absurd.

Someone has to pay for all of this, and much of it has been “financed” by lucrative TV deals. But this model seems to be reaching its limits. As I wrote recently, the cost of monthly cable bills have been increasing at a rate of about 6% annually. The average cable bill was $86 in 2011. By 2015, it is forecast to be $123 per month. Given that income growth has been stagnant for years, that’s not a sustainable trend. Ironically, Disney’s ESPN is the number-one culprit; the ESPN channels are alone responsible for about $5.50 per month.

The problem with calling the top of a bubble is that, because they are irrational to begin with, they can always get more irrational. But I’m taking the view that Ballmer’s $2 billion purchase of the Clippers will go down in history as one of the dumbest financial moves in history.

Is there a trade to be made here? If you think the bubble has longer to inflate, consider shares of Madison Square Garden (MSG), the owner of the New York Knicks and the New York Rangers hockey team. If the Clippers are “worth” $2 billion, then the Knicks are “worth” double or triple that amount. And MSG, trading at a P/E of 31, looks “cheap” relative to that of the Clippers.

Just be smart enough to know that you’re trading a bubble.

About the author:

Charles Sizemore
Charles Lewis Sizemore is the Editor of the Sizemore Investment Letter premium newsletter and Chief Investment Officer of Sizemore Capital Management.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

Visit Charles Sizemore's Website


Rating: 5.0/5 (3 votes)

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Comments

batbeer2
Batbeer2 premium member - 1 month ago

He may have bought it just for fun. Some might buy a painting and others might buy some cars. If memory serves, he's the largest shareholder of MSFT so buying cars is just not in his league.

coryashpt
Coryashpt premium member - 1 month ago

When you have money to burn one isn't concerned about value. Good article though. Enjoyed the read.

gerrydjr
Gerrydjr - 1 month ago

Great summary on the league. However according to Forbes Steve Ballmer has 21 Billion bucks to his name. I don't think it's an investment as much as it's his show piece. 2 Billion out his pocket, 19 Billion left to blow.....he ain't getting any younger and he can't take it with him.

haoafu
Haoafu - 1 month ago

http://insider.espn.go.com/nba/story/_/id/11005367/the-los-angeles-clippers-sale-begin-new-era-nba

"According to the Los Angeles Times, Fox Sports is paying the Clippers $25 million to air their games in L.A., as compared with the $3 billion over 20 years ($150 million per year) the Lakers get from Time Warner Cable. The Clippers' deal expires in two years, and, although they're unlikely to make anything near the Lakers' figure (much less the $334 million per year the Dodgers will make over the next 25 years from Time Warner), their local rights will be much more profitable on the new TV deal."

Good article. The new TV deal coming in 2 years is going to justify some of the value, but this is his hobby for the most part.

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