Investing in sport stocks

In the previous article, we tried to understand whether football club shares can be viable investments. Although we found a company with an Eyestock rating over 100% we concluded that such investments may be more attractive for true sports fans. A high degree of uncertainty and low sustainability of financial results make investment potential too vague for long-term and stress-free investments. However, can we find more attractive opportunities outside the football industry?

As we already have written, unfortunately for private investors, shares of NFL, NBA, MLB and NHL teams are not publicly traded on the stock exchanges, since these are privately owned companies. With each league’s value steadily rising and sports teams’ businesses booming, they are in no rush to go public. Forbes made a good assessment of almost all the teams in its materials, but this is more entertaining than analytics. Why? Without the opportunity to buy shares on the stock exchange, we can only look at the $281 m annual revenue of the Edmonton Oilers, the $765 m annual revenue of the NBA’s Golden State Warriors and the $1.14 b annual revenue of the NFL’s Dallas Cowboys, who lead their respective sports by this metric.

What is available to retail investors?

Madison Square Garden Sports (MSGS ticker on NYSE) is a professional sports company that owns and operates a portfolio of assets featuring teams in sports, including the New York Knickerbockers (Knicks) of the National Basketball Association (NBA) and the New York Rangers of the National Hockey League (NHL). The Knicks are currently the second team in the Atlantic Division, while the Rangers lead the overall NHL standings. Not bad assets. The firm also operates two professional sports team performance centers, such as the Madison Square Garden Training Center in Greenburgh, and the CLG Performance Center in Los Angeles. It sounds very interesting to become an indirect co-owner of two New York sports teams through one company, isn`t it?
But let’s look at the numbers: a market cap of more than $4 b while a profit over the last 12 months is only $38.6 m. Looks so overvalued!. What is hidden behind the price-to-earnings ratio of 113? This valuation is high even for the most hype and fashionable company with an AI agenda, but here we have a negative capital and low profitability instead of high-tech. Our final rating is extremely low — only 8%, and we usually try to avoid such investments. In fact, over 5 years, the owners of these shares received a negative return in the form of a 15% decline in prices!

Fighting promotions

Endeavor Group Holdings, Inc. (NYSE: EDR) operates as an intellectual property, content, events, and experiences company. The firm owns and operates premium sports properties, including the Ultimate Fighting Championship (UFC), produces and distributes sports and entertainment content.
EDR shares with a rating of 33% according to the Eyestock methodology are far from investment attractiveness. Excessive debt load, unstable financial performance and low return on capital obscure the high level of profit that remains after deducting all expenses from the company’s almost $6 b annual revenue.
In addition to UFC, the company, through a subsidiary, also owns World Wrestling Entertainment Inc, which has its own financials and a separate direct listing of its shares on the New York Stock Exchange under the ticker WWE.
Moreover, they, less burdened with debt and with a better ROE of 39%, have a higher Eyestock rating than the parent company (78%) and the potential for stock growth.

Racing Stocks

We recently wrote a research about Red Bull shares, which are strongly associated with Formula One racing. Since shares of Red Bull, like many sports teams, cannot be purchased on the stock exchange, we have identified the possibility of investing in a rather attractive business of the main competitors of the Austrian-Thai concern — Monster Beverage (MNST).
NASCAR, MotoGP and Formula 1 are among the energy drink producer’s sports investment portfolio.
After a long collaboration with the Mercedes F1 Team Rodney Sacks, Chairman and CEO of Monster Energy Company and Zak Brown, CEO of McLaren Racing, have signed a contract for cooperation between the companies in Formula 1. However, let’s be honest, buying MNST shares can be considered an investment in sports and racing in particular. There are more direct ways.

Liberty Media Corp (Nasdaq: FWONA).
Even though this company operates in the media business, it has owned the commercial rights to Formula 1 auto racing since 2016. Interest in the oldest and legendary racing series is growing in the United States. This is evidenced by ESPN’s numbers and ratings for Netflix’s Drive to Survive. However, this interest has not yet translated into strong financial performance for FWONA. Revenue is growing rapidly, but net profit is not.

Along with it, the profitability of the business is stalled. The final rating of 30% according to the Eyestock methodology for FWONA stocks still indicates high investment risks, despite the multiple growth of share prices in recent years. Although the rating grew along with the price chart, it is a mirror of financial performance and the state of the company is still far from what we call a viable investment.

But many people associate Formula 1 not with the Red Bull or Mercedes brands. Ferrari (NYSE: RACE) has always been and remains the icon of this motorsport series. It’s not for nothing that almost all racers at one time or another make a similar statement: «Since childhood, I dreamed of competing for Scuderia!»
So Lewis Hamilton, 7-time world champion after his long successful career first with McLaren, then with Mercedes, driving which he won 6 out of 7 titles, will wear a scarlet jumpsuit in 2025! This will be a very interesting twist of intrigue. And the recent race of the Australian Grand Prix ended with a technical retirement of Max Verstappen’s Red Bull car and a winning double for Ferrari when Carlos Sainz Jr. raised the winner’s cup over his head, and Charles Leclerc climbed to the second step of the podium.

One gets the feeling that this year there might be some intrigue. And this benefits everyone: both Ferrari and Liberty Media. But besides the sporting component, owning Ferrari shares is also intriguing from a financial point of view. On December 7, we published The Best Car Manufacturer article, explaining why we think Ferrari is better than Tesla, Mercedes and BMW as a business.
Since then, RACE shares have risen almost 14%. An already quite expensive company has become even more expensive. The current price-to-earnings ratio is 58, while the average is only 41. Answering the question, is RACE stock overvalued? Yes, RACE stocks are overvalued! But it is still #1 in our automotive stock pick list here.

If we mentioned Monster Beverage in the context of Formula 1, then it is worth mentioning another company, also originally from Italy — Pirelli (PIRC.MI on Borsa Italiana). Since 2011, the Italian tire manufacturer has been a monopoly supplier not only for the Formula 1 series teams but also for the Formula 2 and Formula 3 youth series. But it is important to understand that this company does not receive money for tires, but pays about $100 m for the official supplier status, receiving in return marketing benefits. What makes Pirelli special? With a moderate rating of 63%, the company’s shares are trading 13% below the average value, being undervalued by Eyestock methodology.

Sports betting

Being supporters of reasonable and balanced investments for the long term, we cannot classify ourselves as fans and ambassadors of such a business as betting. Unfortunately, such a kind of addiction is a serious problem that exists in the modern world. However, industry majors like Draftkings (Nasdaq: DKNG) with a market cap of $22.4b and Churchill Downs (Nasdaq: CHDN) with a market cap of $8.7b could provide alternative sports-related investments. But it seems to us that when sports and money betting are mixed, the pure pleasure of your team’s victory or the true bitterness of defeat is washed away by the bookmaker’s account changes.

Gaming

When we talk about games related to sports, simulators from the FIFA series immediately come to mind, as well as strategies under the FIFA Manager series by Electronic Arts (EA on Nasdaq). The contract between the company and the International Federation of football has expired after a long cooperation. At the end of 2023, the developer released the first game without «FIFA» in the name, called EA Sports FC 24, which for a long time occupied a leading position in the gaming charts. Volatility in financial performance remains a major risk for investors in EA shares, but strong profitability and a strong balance sheet give an overall Eyestock rating of 79%, and the share price of $130.9 as of March 26 is trading below the average value.

Bottom Line

Sport is a very interesting area of our lives, and there are definitely opportunities for investing in it. We have found an attractive football club, CCP.L, with an Eyestock rating above 100%, and an excellent car company, Ferrari, which is directly related to sports. But most interesting sports teams and clubs continue to remain privately owned, distributing profits among a narrow circle of shareholders. As a result, the conclusion suggests itself that it is better to enjoy the game of your favorite team at the stadium rather than worry about its earnings and your brokerage accounts.

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