There are few other companies that can demonstrate how overpriced the market has become like World Wrestling Entertainment (WWE, Financial). Since 2015, the company's stock has appreciated seven fold with far too little fundamental value added in order to justify the paper gain.
Financially speaking, the $210 million gain on the company's top line and $39 million gain on its bottom line has resulted in more than $4 billion in market appreciation. The company is currently valued at $5.5 billion, yet earns just $63 million on $869 million in revenue. That equates to earnings per share of 72 cents over the past 12 months. The stock is trading in the $70 range currently, so the disconnect is obvious.
In September, on the back of a lucrative cable deal, WWE's stock was sent to all-time high prices -- close to $100 a share. The pioneer in professional grappling had just signed a five-year, $1 billion deal to have its Smackdown Live content move from USA to Fox. And, while the $205 million annual value is a 200% increase over the company's current agreement with NBC Universal (a Comcast company), it certainly doesn't mean that more people will be watching the programming, even with the cross-network promotional selling opportunities.
The company has 1.8 million paid subscribers and looks to earn 80 cents per share in 2019. Further, World Wrestling is expanding internationally, which should keep the financial performance heading upward. WWE has a pretty strong base of viewers that will keep its financial results rock solid. Coming off WrestleMania's record-setting year can mean only one thing. But there's not much upside left and much downside risk attached.
If I was going to short a stock in this market, this would be it. The company spent almost 20 years bouncing up and down from $10 to $20, and now the hockey stick chart looks artificially inflated by speculators. The company has never been that profitable, but based on its average price-sales rate (2.1x), the market value should be closer to $1.8 billion. That would once again put the stock in the $20 range, giving would-be short-sellers a 70% profit. One misstep or continued market volatility, and that drop could happen sooner rather than later.
This is not a technology stock that can scale its way out of market trends. It's a content producer, a one-trick pony and regardless of how great that content may be for its target market, there is no way WWE can remain propped up at this valuation.
Disclosure: I am not long/short WWE.
