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Man, do I wish I was a bigger fan of World Wrestling Entertainment (NYSE: WWE ). Of course, that's no guarantee that I would have caught any of the 265% rally in WWE stock over the past year, but it certainly would have helped.
Given that the stock is up so much, though, investors have to be wondering if there's more upside left. What's the deal here?
For starters, there's serious investor and M&A appetite for high-quality content. Whether one likes WWE doesn't really matter. Clearly, enough people do, and that's allowing WWE management to negotiate strong broadcasting rights deals and build out attractive subscription plans.
The company's ability to leverage technology is helping to bring in new customers and subscribers. It's also helping to boost WWE's margins and free cash flow (FCF). In fact, BTIG analyst Brandon Ross just bumped his price target on WWE stock to $92 from $75, now that WWE has hit his recent mark.
Of course, Ross maintains a buy rating as well, arguing that WWE stock is one of the "safest plays in media" thanks to its strong FCF growth and visibility. Further, he's optimistic about the broadcasting deals WWE can nail down in India and the U.K. after seing what it did in the U.S.
Should WWE stock rally to Ross's new target, it represents another 22% of upside from current levels.
Trading WWE Stock
Some investors will likely laugh at that kind of rally, given that WWE stock is up 265% over the past 12 months. But it's not as ridiculous as it may sound. At least, based on past performance.
Back in May, WWE stock was severely overbought, but we said investors shouldn't short the stock. It's a good thing they didn't as WWE was at $60 then. That said, we also weren't huge buyers of the name. Our argument was :
"While it may seem like a no-brainer short, these big-runners don't tend to treat bears very well aside from a temporary fall. If you're too tempted to short - which I'm not - don't overstay your welcome. Remember, WWE was overbought before Monday's 14% rally, too. Sometimes the best trades are ones you watch from the sidelines."
WWE stock consolidated nicely from that point on and began legging higher as a result. So what should investors do now? I want to see WWE consolidate again, and I'd like to see it stay above $70 per share. It's still technically sporting an overbought condition (blue circle), but that overbought condition has declined notably over the past six weeks despite a 25% run in the stock price.
Investors who are interested buyers can either look to buy on a break above $77.50 to new highs or on a consolidation that holds up above $70.
Keep in mind that World Wrestling Entertainment will report earnings on Jul. 26, though. Call me a chicken, but I'm not someone who tends to buy a stock that's up roughly 75% between quarters. Likewise, I'm not someone who shorts a move like that either. As I said, I'm on the sidelines with WWE.
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Valuing WWE Stock
Where does WWE stock stack up with its valuation? That's a good question. Analysts are looking for the company to generate $861 million in revenue this year, up 7.5% from 2017. They are then looking for an acceleration in 2019, with growth of 13.3% to $976 million.
Analysts expect WWE to earn 91 cents per share this year, up more than 62% from last year. Further, estimates call for 53% growth in 2019.
However, WWE stock is far from cheap, with shares trading at 80 times this year's earnings. With WWE closing in on $1 billion in annual sales in the next few years, you know business is going well. However, with a $5.8-billion market cap, that leaves WWE stock trading at a somewhat lofty 6.7 times this year's sales.
Throw in the fact that, unlike Visa (NYSE: V ) or Facebook (NASDAQ: FB ), WWE stock has relatively low margins, and its valuation looks even more rich.
The bottom line? I definitely wouldn't bet against WWE stock at this point. Its technicals are too strong and momentum - both in the charts and the business - is too strong. That said, I'm not a buyer right here from an investment standpoint.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell . As of this writing, Bret Kenwell was long V.
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