WWE Stock: Is It Time to Bail on World Wrestling Entertainment, Inc.

WWE StockShares of World Wrestling Entertainment, Inc. (NYSE:WWE) have dropped about 18% for the year, but investors shouldn’t bet on WWE stock being down for the count.

WWE reported its earnings this past week, easily beating analyst expectations for the fourth quarter of 2015 with record revenue for the full year. The company reported fourth-quarter adjusted earnings of $0.04 on revenue of $166.2 million against breakeven earnings and revenue of $161.3 million. For the full year, revenue increased 21% to $658.8 million, the highest in the company’s history. (Source: “Investor Relations,” WWE web site, last accessed February 12, 2016.)

With the stock seeing a bit of a sell-off, this may be a good opportunity for investors to take a look at WWE.

Let me explain why.

The biggest and most important growth driver going forward for WWE will be the number of paid WWE Network subscribers it has. Launched in February of 2014, the WWE Network is a streaming service, much like Netflix, Inc. (NASDAQ:NFLX), which costs $9.99 in the U.S.

WWE is pushing users to the network, trying to wean them off the old model of selling monthly pay-per-view events. The streaming service includes all the pay-per-view events as well as over 4,300 hours of original content.

WWE is also starting to push the service internationally, providing more opportunity for growth. The WWE Network was recently launched in India, German, Austria, Switzerland, and Japan, with plans to launch soon in China, Thailand, and the Philippines.

So far, the move to a streaming model is paying off big-time.

In the latest quarter, average paid subscribers grew 72% over the previous year. (Source: “Key Performance Indicators,” WWE web site, last accessed February 12, 2016.)

The stock is down about 10% since the company’s latest earnings report, largely based on subscriber growth guidance of about 1,280,000 added average paid customers, which is “only” an increase of 38% over the previous year. (Source: “Investor Relations,” WWE web site, last accessed February 12, 2016.) What investors don’t seem to understand is that subscriptions so far have shown a seasonal pattern, with the largest jump in growth occurring around its “WrestleMania” event and then stabilizing afterwards. This year’s WrestleMania falls in the second quarter on April 3; whereas last year it fell in the first quarter. Subscriber growth should see more of a jump in the second quarter; results come out in a few months.

By migrating its customer base to the streaming service, World Wrestling Entertainment will now have a clearer picture of its revenue. Under the pay-per-view model, revenue would vary largely based on the interest in each monthly show.

The Bottom Line

All in all, the WWE Network may see Netflix-like growth in subscribers at least over the next few years. However, long-term subscription growth is a bit murkier, since World Wrestling Entertainment must count on growing its limited fan base.

WWE stock was added recently to the S&P SmallCap 600 index, which should also be a positive development for investors. It demonstrates that WWE is a sound small-growth company.

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