Top investment analysis firm Lightshed Partners took a look at WWE stock this week and noted that they could not recommend a buy right now because of “too many critical questions surrounding the company,” mainly WWE’s creative direction and whether there will be a significant rebound in their TV ratings, even in a post-coronavirus world.
It was noted that a recommendation was almost made in June due to how well WWE has dealt with the COVID-19 pandemic, in keeping costs down while fulfilling contractual content obligations to their TV partners. However, they feel that the timing is just not right for a recommendation after what concerning issues they’ve seen in the past few weeks. Lightshed’s analysis pointed to how there could be another significant decline in the WWE TV ratings with the NHL and NBA returning to TV, and how WWE’s TV success is more important than ever.
They wrote, “WWE’s television engagement is more crucial than ever, as we see a potential domestic devaluation in sports rights coming, particularly as WWE’s current partners look to rationalize their sports rights’ portfolios. Also, while aspects of this company’s growth strategy remain cloudy, one thing we do know is that Vince McMahon views WWE simply as a content studio for third parties. With all this in mind, another recent ratings dive for Raw and SmackDown gives us trepidation, especially following the ousting of Paul Heyman, the head of Raw creative. With so little fresh content, let alone sports/live content, we have been surprised WWE ratings have not improved. Now, with the NBA and NHL returning, we fear ratings could take another leg down.”
The WWE Network is another key question as they do not expect a resolution on a transformative Network deal to come for a very long time. They added, “We also would like to understand the company’s growth strategy and level of investment, capital allocation and find comfort with new management (the company hired a new CFO, Kristina Salen a few weeks ago).”
Lightshed currently has a rating of “Neutral” on WWE stock. It was noted that they will be open to once again recommending the stock if they see a notable improvement in content/ratings, and if they have a better understanding of the issues mentioned above.
The analysis notes that the margin for error for WWE content is going to be lower than ever, especially with the content on RAW and SmackDown, as WWE looks ahead to negotiating their next TV deals with NBCUniversal and FOX in late 2022. Lightshed believes WWE content has not resonated and the proof is how TV ratings have dropped since the current big money deals were signed.
“Declines in television viewership have been part of the problem, but sports / live have held up better than the rest of the ecosystem. And, one of the reasons the current partners were willing to pay is that WWE itself was holding up much better than the rest of TV (FOXA also fortuitously sold most of its assets to Disney and WWE fit with its programming strategy),” they wrote.
The analysis also looked at the impact of the coronavirus pandemic, and how WWE has had a period where they’ve faced competition from fewer live sports leagues, which is coming to an end.
“COVID-19 has clearly compounded the problem,” Lightshed wrote. “We absolutely do not want to minimize the impact from COVID. WWE is reaction entertainment and no live audience hurts. A look at the ratings across AEW, NXT, Raw and SmackDown shows all were impacted negatively by the virus. That being said, AEW and NXT ratings have actually been climbing back. In July, AEW was up 11% versus April on average. NXT has notably improved against both March and April in the past two months. Meanwhile, both Raw and SmackDown have taken another leg down in the past month, with Raw down 10% and SmackDown down 8% compared to the prior month and both down 15% compared to April. Understanding seasonality in the WWE calendar, we looked at the ratings in terms of year-over-year declines. In July, Raw ratings have been down 37% and SmackDown down 6% (even with SmackDown’s move to Fox broadcast). Of note, Raw viewership has made fresh all-time lows multiple times this summer.
“Ratings are likely set to decline further as sports returns, especially with the NBA coming back on Thursday night. WWE has had a sustained period with less live competition and that is coming to an end.”
It’s interesting how Lightshed also covered the issues with WWE creative. They noted how WWE Chairman Vince McMahon has acknowledged that things need to change, and there have been various experiments with creative, but nothing has worked. They mentioned how Vince hired and fired Paul Heyman and Eric Bischoff to work creative roles, and how those roles are now consolidated under Bruce Prichard one year later.
“COVID or no COVID, creative appears to be at the center of the issues,” Lightshed wrote. “Vince McMahon has acknowledged things need to change multiple times. However, while there have been short lived experiments, the content appears to continuously return to a similar formula under his absolute control. McMahon went so far as to hire creative heads for Raw and SmackDown a year ago, with Paul Heyman heading Raw and Eric Bischoff heading SmackDown. Neither are in their roles a year later. Bischoff was fired after four months on the job and Heyman was relieved last month. The role is now consolidated under Bruce Prichard.”
WWE’s inability to create new Superstars was also covered. It was noted how much of the talent that can draw are aging, and bringing back older stars like The Undertaker is just a band-aid, and not a long-term strategy.
“One of the largest problems we have identified is an inability to create new Superstars,” Lightshed wrote. “Every era of WWE wrestling has been defined by some key stars at the top. Recent years have been bereft of that star power, with Roman Reigns the closest but never on that same level. More broadly, there really has been very little younger talent that have broken through at all on their way to replenishing even the middle level of stars in the men’s division. This has made the company more susceptible to injuries / absentees of major stars. Much of the talent with drawing power is aging. And, the big draws for major events have been in bringing back even older wrestlers such as Goldberg and The Undertaker. That is a band-aid, not a long-term strategy.”
Lightshed believes WWE has plenty of time to fix their roster in before going back into TV negotiations for RAW and SmackDown, especially with the talent pipeline they have with WWE NXT. They speculated that a longer-term approach is likely the right way to go, even if ratings return more slowly. It was also speculated that Triple H, who heads up NXT creative, could be a big help in fixing the main roster issues.
Regarding the WWE Network, the analysis noted that a major deal for the platform is not expected soon. They believe Vince lost patience with the Network as subscribers flattened and the real payoff on data ambitions was never fully articulated. The Network once appeared to be at the center of WWE’s long-term growth strategy with George Barrios and Michelle Wilson as Co-Presidents. They were let go in January. Lightshed speculated that with the desire to make up for WWE’s international TV rights shortfall, Vince dramatically shifted direction and put the WWE Network, or at least its key pay-per-view content, up for sale. The hope was that a “transformative deal” would be finalized by Q1, but then COVID-19 it. Lightshed said it’s “torn” on the right future for the Network, and have grown more skeptical with time. They speculated that WWE may not have what it takes to be a stronger Direct-To-Consumer company.
“Frankly, we are torn on the right future for the Network,” Lightshed wrote. “We still believe those companies that can have DTC (Direct-To-Consumer” relationships are far more better off in the current media ecosystem. Admittedly, though, we have grown more skeptical of the Network with time. It might just be that WWE doesn’t have the DNA to be great at DTC / grow it far beyond what it is today.”
The report also noted that WWE’s international growth is a key opportunity moving forward.
“WWE was early and persistent in its digital ambitions – realizing the power of social/digital to deepen engagement and serve as a global marketing tool. What was interesting is that 80% of this digital engagement came from abroad,” Lightshed wrote. “Any ability to close the domestic and international monetization gap could be a significant opportunity. This was not to be the case in the most recent renewals, as cumulatively international television licensing will be lower in 2020 than 2019 (a large part was due to a major reset in the more established UK). However, we have not given up on international. Some stronger WWE markets are growing rapidly with content monetization still with room. We also believe more emerging markets could be more interesting to the digital platforms than the US and even Europe.
“As such, we are strong proponents of major international investment. A detailed growth / investment strategy has not been communicated to the Street (which is understandable given COVID-19 but helps keep us on the sidelines). When we do hear, international needs to be a heavy priority. We hope to see minimally a realization of the international academy model plan.”
Lightshed predicted a return to “Normal” for the stock in 2021, with no significant deal for the WWE Network. It was noted that WWE will need to “decide how much it wants to invest to improve its content and build its future.”