Long term value
As we leave summer behind and kick-off a new season of sports leagues the internet is flooded with articles about the future value of professional sports. There are questions raised about the value of sports media rights with many predicting fees will be under significant pressure compared to previous years.
Precisely a year ago I wrote a piece questioning the value of a newcomer in the sport business, Peloton, the pricey internet-connected exercise bikes ($2,245) and treadmills ($4,295) which was valued at $8.1 billion pre-IPO. In the last 12 months the number of members increased from 1.4 to 3.1 million through June 2020. The market valuation has swelled to $25 billion and trades on 279 times forward earnings. This is massive, Amazon ‘only’ trades on a multiple of 69 times. Of course, some of this growth could be attributed to lockdown and gym closures resulting in people working out more at home. The question still remains, how can you predict value and sustainable growth in a world gripped by a pandemic like Covid-19?
This is a challenge faced by many franchises across the sport business. Contracts for the NFL and media partners worth $5.1 billion are due to expire over the next two years and the most lucrative, Monday Night Football, with ESPN worth $1.9 billion ends 2021. In another form of football, newly promoted teams to the English Premier League will be counting on sustained popularity to inflate their market value. After 16 years outside the Premier League, Leeds United owner Andrea Radrizzani believes the value of the club could be £600 million to £1 billion in five years. Wishful thinking? Whilst US sports franchises have sold for billions this has not been the case in Europe. Even the wealthy founder of Ineos, Jim Ratcliffe who was interested in Chelsea was not willing to pay the asking price of £2 billion and opted for French side OGC Nice for €110 million instead.
The same questions are being raised about the valuation of big tech stocks which have continued to grow despite recessions and the pandemic we are now facing. The general consensus appears to be a ‘healthy correction’ is on the way. But even so the gains are still worth the investment, especially for owners of best-in-class stocks. Perhaps there is no justifiable comparison between sports franchises or media rights and tech stocks, but some parallels can be drawn. Any shift in consumer behaviour, driven by Covid-19 or not is influenced by innovation and disruption. In the sports industry, esports has long been quoted as a challenger to traditional sports viewing, ticket sales and merchandise albeit a fraction of the revenue. As such the entrance of David Beckham as a shareholder in Guild Esports is one stock to watch regardless of whether this is seen as innovation or disruption. How much can one man’s brand or reputation create added value? Read ‘The Beckham Experiment’ by Grant Wahl and you can find some of the answers.
For an industry so dependent on financials and tight margins, there are not many formulas or universal models applied to the business of sport. This thought crystalized as I watched a webinar last week preparing for the Fantasy Premier League. The winner of the 2019/20 season was Joshua Bell, a mathematical researcher from Oxford University. Despite so many variables and unpredictability of 20 football teams, which is the basis for the Fantasy Premier League, Joshua used modeling and maths to explain how to pick a winning team. This is something that interests about 8 million fans playing the Fantasy Premier League each week. Armed with new insights and models, I am expecting the long-term performance and value of my fantasy team to exceed all expectations. If only the same could be said about sports media rights over the next 12 months!