WWE (NYSE:WWE) stock continues to body slam its detractors, as it keeps attracting buyers. However, this momentum has pushed WWE stock higher, even to levels that surpass its rate of profit growth.
Before opening a position in WWE, investors need to determine if the stock still has any flying kicks left or if it will fall victim to a diving drop?
WWE Continues to Better Monetize Its Assets
To be sure, WWE stock continues to make a big splash. After spending almost all of the twenty-first century trading between the high-single-digits and in the low $20-per-share range, it finally escaped this level late last year. Since then, the company has taken off like a rocket. In the previous 12 months alone, WWE stock has risen by about fourfold.
The question now becomes whether the stock continues to rise or if its valuation clotheslines this rally? Few can doubt the company has gained a better claw hold on its destiny. Analysts credit improvements such as improved distribution, customer retention and market expansion.
Content has helped stocks such as Netflix (NASDAQ:NFLX) rise higher in the last few years. It has also become the impetus for a battle between Disney (NYSE:DIS) and Comcast for the majority of Fox’s content. In fact, what will remain of Fox after that deal will focus heavily on sports.
This emphasis on content has made an enormous difference in the profit growth of WWE. Company profits came in at 56-cents-per-share last year. This year, analysts believe WWE will earn 80 cents. They also predict consensus earnings of $1.32-per-share for next year.
Valuation, Momentum Drive WWE Stock
However, the reason for its current 138 price-to-earnings ratio may lie in its 2020 earnings. As of this writing, consensus earnings for 2020 come in at $3.29-per-share. If this occurs, it would mean earnings growth exceeded 150% for that year. Before this move higher, the P/E had held around 57.5 in both 2015 and 2016. If the company returned to that multiple in 2020, that would place the stock at just under $200-per-share two years from now.
Such philosophies have allowed Netflix and Amazon (NASDAQ:AMZN) to rise in recent years. Such a scenario could tempt investors of WWE stock as they have spent the last 12 months hoisting the championship belt.
However, fourfold stock price increases rarely repeat. Furthermore, negative investor sentiment, or even a loss of enthusiasm, can perform a leg sweep on a stock rally. For example, if the 2020 profit scenario I mentioned above matches Fox’s average P/E of 16 instead of WWE’s, it would take the stock to about $52-per-share, well below today’s levels.
That said, stocks that have rallied like this sometimes continue to surge. If the herd wants to keep bidding a stock higher, it will do so. Shorting such a move can easily body slam a stock portfolio. During the summer, our own Bret Kenwell called WWE stock an overbought stock that investors should not bet against. Two months later, the stock price has changed, but I believe the sentiment remains the same.
The Bottom Line on WWE
The moves in WWE stock indicate the equity has become an overbought equity enjoying high profit growth. The moves made by the company to increase profit have justifiably lifted WWE from its years-long trading range. WWE has done well in monetizing its brand and its valuable content. Profit growth has seen massive increases as a result.
However, its impressive spike in net income does not justify the WWE stock price quadrupling within a year. Since investors cannot fight momentum, I would recommend against shorting this stock. Still, with the high valuation and the recent stock price growth, I also cannot advocate jumping into the ring.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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