World Wrestling Entertainment (NYSE: WWE) is not immune to the unusual malady that’s afflicting most digital content providers. Its business and revenues are growing but its income is shrinking.
Revenues at Vince McMahon’s wrestling empire grew to their highest level yet in Second Quarter 2016; rising from $653.69 million to $702.50 million. That made for a revenue gain of $48.81 million which is very impressive. The growth has been ongoing since McMahon launched his WWE network in February 2014.
At the launch of the network in March 2014, WWE reported a TTM revenue of $509.54 million. That number grew to $593.23 million a year later, and $653.69 million two years later. McMahon has been able to achieve a significant amount of organic growth; which is impressive given today’s stagnant economy.
Where’s the Income?
The problem is that growth is not translating into income or cash. WWE reported a net income of $24 million in June 2016, which was certainly an improvement over the $7.353 million in 2015. Yet that number was down from March 2016, when it reported $28.26 million a drop of $4 million.
To its credit the WWE has reversed the negative income it suffered in June 2014 when it reported losses of -$27.98 million instead of income. Yet it is still struggling simply to make money from the digital network.
The financial numbers for second quarter 2016, cast serious doubt on the contention that digital entertainment subscriptions will generate float. WWE charges wrestling marks $9.99 a month for a subscription. The depressing data for that date supplied by our friends at ycharts include:
- A profit margin of .43%
- A free cash flow of -$7.617 million.
- $24 million in cash from operations.
- Assets of $396.31 million
- Cash and short-term investments of $79.91 million.
Why WWE and Netflix Cannot Make Money
The inability to generate float from digital subscriptions is not unique to WWE. Netflix (NASDAQ: NFLX) reported a free cash flow of -$237.11 million and -$895.60 million in cash from operations on June 30, 2016. The only companies that seem to be able to make money from digital entertainment are Amazon (NASDAQ: AMZN); a company that has many other sources of revenue, and Sirius XM (NASDAQ: SIRI) which has a captive audience for its car radio systems.
A big problem facing digital entertainment providers like WWE and Netflix is Amazon; a gigantic competitor that is using digital entertainment away as a loss leader. Jeff Bezos seems to view digital content as something he can give away to attract more customers to Prime and more float.
The threat Amazon Prime poses to all digital entertainment providers is obvious. Subscribers get streaming video and free shipping on Amazon at the same time. All Netflix can offer is television and movies. All WWE can offer is wrestling and a few shows it produces in house.
This means a new business model for digital entertainment is necessary. The most likely model is one backed by a larger business as Amazon and Sirius demonstrate. Amazon’s video service is supported by a vast ecosystem that includes everything from groceries to student loans. Sirius is backed by John Malone’s Liberty Media (LSXMB) empire; which includes a wide variety of entertainment properties.
This means WWE might have to become part of a larger organization at some point. Like Yahoo! (NASDAQ: YHOO); and Sirius, it may have to become an acquisition target just survive. One has to wonder if the McMahon family; which controls WWE, would be willing to work with John Malone or not. They may have to if they want to keep their family business alive.
Is WWE a good investment?
Strangely enough WWE might be a good short term investment. It is cheap; trading at $20.36 a share on August 9, 2016.
More importantly WWE did offer shareholders a dividend yield of 2.43% and a return on equity of 11.23%. If you’re looking for a cheap trade you can sell to make a few bucks in the near future or a fun stock to add to your portfolio. WWE is well worth your consideration.
It is also a much better deal than the grossly overpriced money loser Netflix. Even if Vince McMahon’s gamble on digital entertainment does not pay off you might make some money from WWE. That’s more than one can say for Netflix.