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The Surprising Media Giant Taking On Netflix

Stone Cold

Professional wrestling and its compelling storylines and acts of daring feats might be fake, or scripted, but wrestling profits certainly aren’t.

Exploits by World Wrestling Entertainment, Inc. (NYSE: WWE), a leading media stock in the space, are serving to highlight recent failures by another media darling—Netflix Inc. (NASDAQ:NFLX).

And in the wake of the Netflix quarterly scorecard, many Netflix investors will be asking if the company just hit a speed bump or a brick wall.  

It appeared like the beginning of an annus horribilis for NFLX stock. The stock took a pounding, suffering a hammering to the tune of 10 percent in mid-day trading Tuesday before investors made up their minds that it’s not the end of the world and allowed it to pare back some losses.

But I digress…

Even before the latest carnage, WWE was giving NFLX  a run for its money with an astounding 163.3 percent year-to-date gain vs. 120 percent by NFLX. Analysts have been dishing out upgrades on WWE like confetti, with Morgan Stanley and Oppenheimer the latest to have their take.

Morgan Stanley has jacked the WWE price target to $100 from $58, good for 24 percent upside from the current price of $80.53. The analyst says that the stock still has much gas left in the tank despite the impressive rally, while Oppenheimer sees the stock’s momentum continuing in the near-term despite its stretched valuation.

(Click to enlarge)

Source: CNN Money

New Distribution Deals

A big reason why WWE has become a Wall Street favorite can be pinned on the company’s success in taking professional wrestling mainstream. Related: What Putin Really Wants From Trump

Many people now consume the sport pretty much the way they do video games. In fact, the industry is no longer considered testosterone-fueled, with women making up 40 percent of television viewership of WWE programs. That in part has got to do with superb marketing of women wrestlers like Ronda Rousey, and making sure that women professionals are no longer marginalized as bit players.

The latest uptick by WWE stock, though (up 26.5 percent over the past 30 days), has come after the company signed multi-year distribution deals with USA Network and Fox Sports for its flagship programs in the U.S. The five-year deals cover popular programs such as SmackDown Live (to be to be distributed via Fox broadcast each Friday) and Monday Night Raw (airs on USA).

WWE says that the new deals will increase its average annual value of U.S. distribution by a factor of 3.6x compared to its prior NBCUniversal deal.

The new deals have helped WWE announce that it’s now targeting adjusted OIBDA (operating income before depreciation and amortization) of at least $200 million in 2019. That’s a nearly 80-percent increase compared to 2017’s OIBDA reading of $112M--despite the fact that it will cover just three months of the new deal rates.

Risks To The Bullish Thesis

Despite the WWE turning into a profit machine, there are a couple of risks that investors have to contend with.

First off is the stock’s frothy valuation—with a forward PE of 89.3, WWE stock has the second-highest valuation in the industry behind only HUYA Inc.

Related: The Looming "Hyper-War"

The second is declining viewership across key markets. WWE’s TV viewership in the U.S. in 2017 clocked in at 18.7 million, a 7.5-percent decline compared to 202.M viewers back in 2011.

But right now, WWE is the new Netflix. Investors have largely remained indifferent to the stratospheric valuation by NFLX stock and are likely to follow suit with WWE stock so long as it keeps the profits flowing.

By Alex Kimani for Safehaven.com

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