Don’t Just Watch F1’s Miami Grand Prix. Take a Look at the Stock Behind Formula One.
Liberty Formula One FWONA +1.05% tracking stock had been racing ahead, but a recent pullback before the Miami Grand Prix could be a buying opportunity.
All of that would have been unimaginable six years ago. Miami didn’t have a race, Formula One Group didn’t have a tracking stock, and the sport looked like it was slowly disappearing. When John Malone’s Liberty Media announced that it was acquiring Formula One Group from private-equity firm CVC in 2016, he was met with skepticism.
With Liberty Media at the wheel, the motor sport has done a complete 180. It is now one of the fastest-growing sports in the world, with global viewership during the 2021 race season increasing by 5% year over year to surpass 1.5 billion cumulative viewers, or 70.8 million per race, on average—more than the 17.1 million average for regular-season National Football League games, according to Nielsen data. New races have been added in fast-growing markets, with Miami making its Grand Prix debut this weekend, and Las Vegas scheduled to host its first in 2023.
The motor sport’s rising popularity has spurred renewed interest in the tracking stock (ticker: FWONA), a class of common stock that tracks performance of a specific business segment. Over the past 12 months, the stock is up 48%, and about 200% since Liberty Media acquired Formula One Group in 2016. And it’s not likely to stop there, analysts say. “There’s just too much momentum right now,” says Pivotal Research analyst Jeff Wlodarczak, who has a Buy rating on Formula One Group shares.
That momentum stalled in recent weeks, with Formula One Group shares declining 8.4% since its closing high on April 4 as investors fretted over growth stocks amid rising interest rates. The stock is still expensive—Formula One Group trades at an enterprise value to earnings before interest, taxes, depreciation, and amortization, or EV/Ebitda, of 17.2, higher than the S&P 500 index’s 12.5. Still, it’s far cheaper than its live events and sporting peers. Endeavor Group Holdings EDR –1.95% (EDR), the sports and entertainment company behind Ultimate Fighting, trades at an EV/Ebitda ratio of 61.1, Manchester United MANU –2.19% (MANU) at 34.2, and Madison Square Garden Sports MSGS –3.31% (MSGS) at a historical average of 60 times.
Formula One Group has been rewarded for strong growth—it raked in $2.14 billion in revenue in 2021, about 6% more than in 2019, even though Covid-19 continued to be a problem—and posted operating income of $40 million for the year, up from a loss of $35 million in 2019. In its earnings report on Friday, the company said revenue hit $360 million during the first quarter of 2022, doubling from the same quarter one year ago.
A large bulk of Formula One Group’s sales come from race promotion, or the money that event organizers pay F1 to host the race. Although the season is currently capped at 24 races, Liberty Media is working to boost revenue by charging higher fees for race promoters or switching out low-impact races for higher ones, says Formula One CEO Greg Maffei. It’s also experimenting with promoting its own races, starting with the Las Vegas Grand Prix in 2023. This is expected to drive higher margins, with Guggenheim Partners analyst Curry Baker estimating that it could contribute close to $70 million in operating income before depreciation and amortization, making it the most profitable race on the roster.
But the real upside could come from broadcast rights. Pivotal’s Wlodarczak modeled a 9% increase in broadcasting rights—an estimate he says is conservative and could be “dramatically higher.”
CEO Maffei doesn’t disagree. In the U.S., the sport’s fan base has grown about 10% over the past three years, driven by heightened visibility and marketing efforts such as Netflix’s popular Drive to Survive docuseries. ESPN’s right’s to stream the races in the U.S., which it has held since 2018, are set to expire this year—and reupping them should cost a lot more than the previous deal. The number could be even higher if digital players like Amazon.com AMZN –1.40% (AMZN) and Apple (AAPL), both of which have made moves into live sports, decide to bid.
The company is also “currently working” on hammering out a deal with state-owned China Central Television to expand its presence in the region, says Maffei, and is looking to move into Johannesburg, South Africa, to tap the continent’s market.
For Formula One stock, the race isn’t over—there are lots of laps ahead.