The ongoing rotation from revenue growth stocks into companies with EBITDA and EPS has been felt across the sports industry. After outpacing the S&P 500’s index through the first three-quarters of the year, the JohnWallStreet Sports Stock Index finished 2021 up just 9%, well behind the S&P’s 25% climb. But longer-term trend lines show several sports sub-sector indices still trading above their pre-COVID values. Over the next two days, JohnWallStreet will dive into six public comp. groups (sports gambling, leagues, U.S. teams, European teams, live entertainment and traditional media) and explore how the value environment within each has shifted during the pandemic. We’ll also identify a few equities within the sports ecosystem that may be undervalued—or overvalued—based on current multiples.
JWS’ Take: As part of our analysis, we enlisted John Hutcheson, a managing director at Citi and the head of its sports advisory business to help with the data. To get to the valuation multiple for an individual company, Citi’s Sports Advisory team uses the following methodology: enterprise value (think: market cap of the equity + face value of debt – balance sheet cash +/– adjustments for minority interests or unconsolidated investments) divided by consensus Wall Street EBITDA estimates for a given time period.
The Citi team’s multiples are based on consensus Wall Street estimates for EBITDA in 2023. They use 2023 projections to account for COVID’s continued impact on the projected financials. Hutcheson explained that looking past a period of challenged financials to a time when “things are back to more normalized levels” is the most appropriate way to analyze valuation multiples for companies experiencing short-term dislocation; otherwise, multiples will appear inflated.
There are various macro-level headwinds currently affecting company valuations across the public markets. The ongoing rotation towards profit generation, rising inflation, climbing interest rates and lingering concerns tied to COVID-19 disruption are all negatively affecting stock prices. Every one of the Citi team’s sub sector indices is down since Sept. 30, 2021, except the league index (+11%) and live entertainment index (+13%).
One might have expected the value of a live-entertainment index to have declined over the last two years given that such businesses were decimated in 2020 and 2021, as concerts and live-entertainment events were shut down. But the Citi team’s live-entertainment index actually rose 52% over the period.
Hutcheson explained that Live Nation’s performance has carried the index. LYV took “a hit immediately [following the outbreak. Then] raised capital to shore up its balance sheet and removed a lot of costs from the business,” he said. Today its stock price is close to an all-time high as investors appear willing to look past any short-term pain and towards the long-term growth they anticipate. It helps that the company maintains a commanding leadership position in an industry expected to bounce back.
While I believe in the future of live entertainment, it is reasonable to wonder if Live Nation may currently be overvalued. Based on the investor turn from growth and considering the challenges still facing the industry, it seems difficult to justify a multiple 20.8x the ‘23 EBITDA and a stock price that is up more than 55% since the COVID outbreak (Feb. 19, 2020). For comparison, Vivid Seats trades at 17.3x and Madison Square Garden Entertainment trades at 14.1x.
Online sports betting is among the sectors that has been hit hardest by the recent headwinds. DraftKings, Rush Street and PointsBet are all “square in the headlights of that rotation from growth into profit,” Hutcheson said (RSI fell 39% in January; DKNG slipped 20%). But concerns about the industry’s approach to customer acquisition have also contributed to the sector sell-off. “There is a view in the market that companies are extending beyond the efficient frontier of customer acquisition spend, with a relatively large number of well-funded companies competing to acquire a growing but finite number of new customers. Additionally, there has been no clear timeline communicated as to when these companies will shift from a strategy of acquisition at all costs to margin expansion and profitability. And finally, there are questions around the stickiness of these consumer facing platforms given product similarities and how easy it is to jump from one sportsbook to another,” he added.
While online sports betting stocks have largely traded down in recent months, the Citi team’s sports betting index has traded up since February of 2020 (+17%), the period COVID began to impact global equities. Hutcheson says that makes sense as a longer-term trend. The combination of consumers with excess time and money to spend, the evergreen nature of sports and the constant flow of new states opening up over the last two years made the sector a “COVID beneficiary.” Although stock prices have tumbled over the trailing 12 months, many sports betting companies—including DraftKings, Flutter, PointsBet and Entain—have achieved meaningful gains from pre-COVID times.
We mention Entain because while B2C sports betting businesses have struggled with rising customer acquisition costs of late, those on the B2B side (which tend to be more stable from a customer retention standpoint and trade based on EBITDA multiples vs. revenue multiples) have largely been shielded from the CAC-related noise.
Citi Sports Advisory’s publicly traded league index also reflects greater value today than it did pre-COVID (+25%). Hutcheson explained that is largely driven by Formula One’s success. While company revenues fell from ~$2B in ’19 to $1.15B in ‘20, the Liberty Media subsidiary “took out some costs, weathered the storm and is expected to come back in ’21,” he said, and post greater revenue and EBITDA numbers than it achieved in 2019—one of the few live-event sports properties that can say that. Formula One also managed to capture the cultural zeitgeist over the past two years, thanks in part to the popular Netflix docuseries Drive to Survive (which likely put it on more investors’ radars) and an incredibly competitive and exciting 2021 season. FWONA shares climbed 48.5% in ‘21.
Formula One’s standing as one of the few publicly traded sports leagues also seems to have been a long-term tailwind. “You can’t buy the NFL in the public markets. You can’t buy the NBA [outside of MSGS]. This is one of the few opportunities to really invest in a global league at scale. As you look across the sports ecosystem, teams and leagues form the intellectual property bedrock from which all other sports businesses are built,” Hutcheson said. (WWE is the other publicly traded league in the comp. group. At 11.1x ‘23 EBITDA, it looks comparatively cheap (F1 is 22.7x). Investors can also get exposure to UFC through Endeavor.)
Tomorrow we will look at three of the Citi team’s indexes that have experienced share-price depreciation over the last two years: European sports teams, U.S. sports teams and traditional media.