LionDen
04-13-2015, 10:44 PM
Fear Strikes At The WWE Network, Causing Investors To Go Psycho
Summary
- WWE stock went down 15% after the release of positive Network subscription numbers.
- The WWE Network model much like any other subscription model takes a couple of years to play out.
- Based on its current share price, Wall Street has placed no value on the Network.
- New metrics need to be developed that quantify the performance of the Network.
http://static.cdn-seekingalpha.com/uploads/2015/4/7/899867-142846233075685-Steven-Borovay--CFP.jpg
The day after WrestleMania, despite positive Network subscriber numbers, WWE (NYSE:WWE) dropped 15% from $16.52/share to $14.09/share on nine times average daily volume. The Network subscriber count of 1.3 million was within 2.6% of my best-case scenario posted in my January 20th article "The WWE Network, Like the Starship Enterprise, Boldly Going Where No One Has Before." Articles emerged immediately stating the 1.3 million sub count was disappointing. However, authors of these articles did not provide any prior benchmarks. Additionally, George Barrios, WWE CFO, announced the Network also will be positive OIBDA on the Network going forward.
So what had changed from the company's January 27th announcement of hitting the 1 million subscriber mark to the announcement after WrestleMania? On January 27th, the stock went up 20% from $10.40/share to $12.50/share on over 5 times average trading volume. Nothing had changed other than Wall Street's perception of the Network. This was based on Barrios' comments that there could be peaks and valleys in Network subs with the overall trajectory upward.
On February 13th, Forbes.com published an article by Mike Ozanian titled "WWE and Vince McMahon are the Future of Sports." Then with the changing sentiment on Wall Street on that March 30th day, Investor Business Daily.com published an article by Bill Peters titled "WWE Shares Get Body Slammed on Subscription Concerns."
As I pointed out in the same Starship article, "a more accurate model to compare Network subscriptions is movie theater box office receipts. Movie goers consistently visit the theaters more during the summer and holiday season with studios timing their releases to hit peak traffic months." What analysts fail to see is what I further stated in that article where I explained, "the point here is that the Network consists of live PPV events and other content. As the quality of other content increases so does the probability of a fan renewing their month-to-month contract. Then the model changes again to where seasonal-based metrics explained above are not as important as they were in the past."
Analysts attacked the WWE Network primarily based on the lack of understanding of the seasonality of this model. With the George Barrios presentation, the company finally came out with a chart that reflects that seasonality. This was old news to me, but not to investors who left the stock on March 30th.
http://static.cdn-seekingalpha.com/uploads/2015/4/10/899867-14287103337057915-Steven-Borovay--CFP.png
There appears to be a general lack of understanding on the time it takes for a subscription model to build its base. I have attached a chart showing how PPV (Paid-Per-Views) of WWE grew from the initial events in 1985 to 1990. It was in 1990 that PPV total buys started to decline. It's impossible to evaluate any subscription model until the positive trends turn negative as that's when the model has hit its peak.
http://static.cdn-seekingalpha.com/uploads/2015/4/9/899867-14285546904546328-Steven-Borovay--CFP.png
Additionally, I show the Netflix chart of US subscribers from the inception of Netflix streaming to 2012.
http://static.cdn-seekingalpha.com/uploads/2015/4/9/899867-14285549387812068-Steven-Borovay--CFP.png
It doesn't require a rocket scientist to see a subscriber-based model take more than a year to evaluate.
But the Stone Cold facts about the current Network subscription growth go counter to how Wall Street currently evaluates the Network. Subscription count was up 97% since WrestleMania 30 in April 2014, up 59% since the 4th quarter 2014 earnings release and up 31% since January's Royal Rumble.
Another reason that it takes time to build a sub base is that people are slow to adapt to new technology. For a WWE fan, streaming is a new way of viewing the product.
What hasn't been pointed out is that with the new Network subscribers there are still PPV (Pay-Per-View) buyers. PPV buys of 2015 Royal Rumble were 141,000. My estimates of PPV for WrestleMania 31 are about 160,000 buys. How many of the PPV buyers have access to the Network, but feel more comfortable paying the full price? My point again is nothing happens overnight.
I've developed a new metric that combines both Network subs and PPV buys comparing these results to 2013/2014 PPVs. This metric is called "Total Paid Engagements." Network subscriber growth is currently based on new subs subscribing that would not have bought a PPV because of the expense, subs staying based on new content, a free month offer that's converted into a subscription, foreign expansion and the fact the internet has 3 1/2 times more reach than cable. It's a bit strange to me that analysts use the means of growth as a negative indicator of how bad the Network is doing. Criticisms include there are not enough new subs, content is adding too much cost to the structure, foreign growth is too slow, offering a free month is a sign of desperation and why would WWE change from a successful PPV model only to the unproven Network.
http://static.cdn-seekingalpha.com/uploads/2015/4/10/899867-14286850477263966-Steven-Borovay--CFP.png
In the illustration, I used quarterly Network subscriber revenue numbers. The revenue is divided by $9.99 and that number divided by 3. The resulting figure was the average sub count for each month during that quarter. For the 2014 year, my average Network monthly subscriber count was 579,746. This number was within 2.2% of the announced 2014 monthly average subscription count of 567,000. The variation is based on the WWE changing the subscription pricing.
The average revenue to WWE for a PPV in 2013 was $21.41 and in 2014 $19.55. To equal PPV revenue the Network subscriber count would have to be 100% of the PPV total. However, 21% of total engagements for the 15 months shown in my analysis are PPVs lowering the breakeven ratio substantially. In the 3rd and 4th quarter 2014, total paid engagements on the new model exceeded the 2013 comparisons by over 300%. Total paid engagements for the 15-month period analyzed for the old model (adding in three months of Network subs) was 5,645,439. With the new model, total paid engagements were 12,298,955.
The 1st quarter of 2015 exceeded the 1st quarter of 2014 total paid engagements by almost 70%. This double-digit gain is critical going forward as it's a benchmark in how the Network is growing. As long as the number is an increasing double-digit positive, I'm not concerned about the long-term prospects of the Network. Even if the sub count dips to 950,000 at the end of the 2nd quarter, year-over-year growth is over 36%. It's hard for me to dispute my numbers, only what they mean. It's anyone's guess what has been priced into the stock as far as sub count. This article just presents another way of looking and interpreting hard numbers.
In over 10 articles I've written on Seeking Alpha on WWE, there was no one who ever disputed my numbers. I encourage those with differing opinions to counter my numbers as I have over 35% of my stock portfolio in WWE. I write these articles as I need the feedback to see what I'm missing. Since I started writing about the WWE Network in September 2014, there is only one major difference in how I view the Network potential now. Some cable providers sell the Network as a premier linear channel. This compromises Network sub counts. However, long-term if the Network is successful in those regions, the size of the cable contract will increase upon renewal.
The closing price of WWE was $13.42 on April 10th. The stock is trading mid-range based on stock prices from 2004 to 2013. The average 10-year high was $16.44/share with the low averaging $10.44/share. During that time, the stock paid an average dividend of $.88/share. Cable contracts increase over $105 million to 2018. Projecting at a minimal the Network is breakeven going forward, if only 50% of the additional cable revenue each year goes to the bottom line, the dividend will eventually increase again. With all that being said what additional value does the Street currently place on the WWE Network? Next to nothing or nothing at all.
Numbers have always fascinated me. Understanding numbers has contributed substantially to my success in investing in stocks dating back to 1978. As much cents as numbers have always made to me, people have not. Short-term emotions, not based on existing facts, especially with program trading, manipulate stocks up or down. Short term it's not been unusual, that because of how stocks trade - I'm sitting on a loss. Long term, if my perspective does not change, I'm usually right.
In September 2014, a month after my birthday, I was diagnosed with Asperger's Syndrome. It now made sense to me as to why I understand numbers, but not people's emotions. I'm just programmed that way. Typically listening only to so called experts on a particular stock have led to losses. It's always been about the numbers. Despite my stock picking ability, I would encourage anyone who invests in a stock to do their own homework. See the reality and not what others create.
In my opinion, the WWE Network is like the tortoise chasing the hare of Wall Street. It will be WWE management's perseverance and exercising good business judgment with the Network that beats Wall Street's expectations that everything good should have happened yesterday. This is a marathon and not a sprint. In the end, I hope it all adds up for all the long-term believers.
Original article can be found by clicking here (http://seekingalpha.com/article/3065926-fear-strikes-at-the-wwe-network-causing-investors-to-go-psycho?auth_param=skt35:1ainl56:1d1b4dec8ac201f7d0 daa73c5f1458ff&uprof=45&dr=1).
Summary
- WWE stock went down 15% after the release of positive Network subscription numbers.
- The WWE Network model much like any other subscription model takes a couple of years to play out.
- Based on its current share price, Wall Street has placed no value on the Network.
- New metrics need to be developed that quantify the performance of the Network.
http://static.cdn-seekingalpha.com/uploads/2015/4/7/899867-142846233075685-Steven-Borovay--CFP.jpg
The day after WrestleMania, despite positive Network subscriber numbers, WWE (NYSE:WWE) dropped 15% from $16.52/share to $14.09/share on nine times average daily volume. The Network subscriber count of 1.3 million was within 2.6% of my best-case scenario posted in my January 20th article "The WWE Network, Like the Starship Enterprise, Boldly Going Where No One Has Before." Articles emerged immediately stating the 1.3 million sub count was disappointing. However, authors of these articles did not provide any prior benchmarks. Additionally, George Barrios, WWE CFO, announced the Network also will be positive OIBDA on the Network going forward.
So what had changed from the company's January 27th announcement of hitting the 1 million subscriber mark to the announcement after WrestleMania? On January 27th, the stock went up 20% from $10.40/share to $12.50/share on over 5 times average trading volume. Nothing had changed other than Wall Street's perception of the Network. This was based on Barrios' comments that there could be peaks and valleys in Network subs with the overall trajectory upward.
On February 13th, Forbes.com published an article by Mike Ozanian titled "WWE and Vince McMahon are the Future of Sports." Then with the changing sentiment on Wall Street on that March 30th day, Investor Business Daily.com published an article by Bill Peters titled "WWE Shares Get Body Slammed on Subscription Concerns."
As I pointed out in the same Starship article, "a more accurate model to compare Network subscriptions is movie theater box office receipts. Movie goers consistently visit the theaters more during the summer and holiday season with studios timing their releases to hit peak traffic months." What analysts fail to see is what I further stated in that article where I explained, "the point here is that the Network consists of live PPV events and other content. As the quality of other content increases so does the probability of a fan renewing their month-to-month contract. Then the model changes again to where seasonal-based metrics explained above are not as important as they were in the past."
Analysts attacked the WWE Network primarily based on the lack of understanding of the seasonality of this model. With the George Barrios presentation, the company finally came out with a chart that reflects that seasonality. This was old news to me, but not to investors who left the stock on March 30th.
http://static.cdn-seekingalpha.com/uploads/2015/4/10/899867-14287103337057915-Steven-Borovay--CFP.png
There appears to be a general lack of understanding on the time it takes for a subscription model to build its base. I have attached a chart showing how PPV (Paid-Per-Views) of WWE grew from the initial events in 1985 to 1990. It was in 1990 that PPV total buys started to decline. It's impossible to evaluate any subscription model until the positive trends turn negative as that's when the model has hit its peak.
http://static.cdn-seekingalpha.com/uploads/2015/4/9/899867-14285546904546328-Steven-Borovay--CFP.png
Additionally, I show the Netflix chart of US subscribers from the inception of Netflix streaming to 2012.
http://static.cdn-seekingalpha.com/uploads/2015/4/9/899867-14285549387812068-Steven-Borovay--CFP.png
It doesn't require a rocket scientist to see a subscriber-based model take more than a year to evaluate.
But the Stone Cold facts about the current Network subscription growth go counter to how Wall Street currently evaluates the Network. Subscription count was up 97% since WrestleMania 30 in April 2014, up 59% since the 4th quarter 2014 earnings release and up 31% since January's Royal Rumble.
Another reason that it takes time to build a sub base is that people are slow to adapt to new technology. For a WWE fan, streaming is a new way of viewing the product.
What hasn't been pointed out is that with the new Network subscribers there are still PPV (Pay-Per-View) buyers. PPV buys of 2015 Royal Rumble were 141,000. My estimates of PPV for WrestleMania 31 are about 160,000 buys. How many of the PPV buyers have access to the Network, but feel more comfortable paying the full price? My point again is nothing happens overnight.
I've developed a new metric that combines both Network subs and PPV buys comparing these results to 2013/2014 PPVs. This metric is called "Total Paid Engagements." Network subscriber growth is currently based on new subs subscribing that would not have bought a PPV because of the expense, subs staying based on new content, a free month offer that's converted into a subscription, foreign expansion and the fact the internet has 3 1/2 times more reach than cable. It's a bit strange to me that analysts use the means of growth as a negative indicator of how bad the Network is doing. Criticisms include there are not enough new subs, content is adding too much cost to the structure, foreign growth is too slow, offering a free month is a sign of desperation and why would WWE change from a successful PPV model only to the unproven Network.
http://static.cdn-seekingalpha.com/uploads/2015/4/10/899867-14286850477263966-Steven-Borovay--CFP.png
In the illustration, I used quarterly Network subscriber revenue numbers. The revenue is divided by $9.99 and that number divided by 3. The resulting figure was the average sub count for each month during that quarter. For the 2014 year, my average Network monthly subscriber count was 579,746. This number was within 2.2% of the announced 2014 monthly average subscription count of 567,000. The variation is based on the WWE changing the subscription pricing.
The average revenue to WWE for a PPV in 2013 was $21.41 and in 2014 $19.55. To equal PPV revenue the Network subscriber count would have to be 100% of the PPV total. However, 21% of total engagements for the 15 months shown in my analysis are PPVs lowering the breakeven ratio substantially. In the 3rd and 4th quarter 2014, total paid engagements on the new model exceeded the 2013 comparisons by over 300%. Total paid engagements for the 15-month period analyzed for the old model (adding in three months of Network subs) was 5,645,439. With the new model, total paid engagements were 12,298,955.
The 1st quarter of 2015 exceeded the 1st quarter of 2014 total paid engagements by almost 70%. This double-digit gain is critical going forward as it's a benchmark in how the Network is growing. As long as the number is an increasing double-digit positive, I'm not concerned about the long-term prospects of the Network. Even if the sub count dips to 950,000 at the end of the 2nd quarter, year-over-year growth is over 36%. It's hard for me to dispute my numbers, only what they mean. It's anyone's guess what has been priced into the stock as far as sub count. This article just presents another way of looking and interpreting hard numbers.
In over 10 articles I've written on Seeking Alpha on WWE, there was no one who ever disputed my numbers. I encourage those with differing opinions to counter my numbers as I have over 35% of my stock portfolio in WWE. I write these articles as I need the feedback to see what I'm missing. Since I started writing about the WWE Network in September 2014, there is only one major difference in how I view the Network potential now. Some cable providers sell the Network as a premier linear channel. This compromises Network sub counts. However, long-term if the Network is successful in those regions, the size of the cable contract will increase upon renewal.
The closing price of WWE was $13.42 on April 10th. The stock is trading mid-range based on stock prices from 2004 to 2013. The average 10-year high was $16.44/share with the low averaging $10.44/share. During that time, the stock paid an average dividend of $.88/share. Cable contracts increase over $105 million to 2018. Projecting at a minimal the Network is breakeven going forward, if only 50% of the additional cable revenue each year goes to the bottom line, the dividend will eventually increase again. With all that being said what additional value does the Street currently place on the WWE Network? Next to nothing or nothing at all.
Numbers have always fascinated me. Understanding numbers has contributed substantially to my success in investing in stocks dating back to 1978. As much cents as numbers have always made to me, people have not. Short-term emotions, not based on existing facts, especially with program trading, manipulate stocks up or down. Short term it's not been unusual, that because of how stocks trade - I'm sitting on a loss. Long term, if my perspective does not change, I'm usually right.
In September 2014, a month after my birthday, I was diagnosed with Asperger's Syndrome. It now made sense to me as to why I understand numbers, but not people's emotions. I'm just programmed that way. Typically listening only to so called experts on a particular stock have led to losses. It's always been about the numbers. Despite my stock picking ability, I would encourage anyone who invests in a stock to do their own homework. See the reality and not what others create.
In my opinion, the WWE Network is like the tortoise chasing the hare of Wall Street. It will be WWE management's perseverance and exercising good business judgment with the Network that beats Wall Street's expectations that everything good should have happened yesterday. This is a marathon and not a sprint. In the end, I hope it all adds up for all the long-term believers.
Original article can be found by clicking here (http://seekingalpha.com/article/3065926-fear-strikes-at-the-wwe-network-causing-investors-to-go-psycho?auth_param=skt35:1ainl56:1d1b4dec8ac201f7d0 daa73c5f1458ff&uprof=45&dr=1).