Endeavor Group Holdings is closing out its first month as a publicly traded company with a stock that is up 24% from its IPO price of $24. The company that is home to UFC, WME, IMG and other media and event brands has a good momentum story to tell as UFC in particular looks to benefit from what is appears to be pent-up demand for sports, concerts and other live events.
For those who have wondered how Endeavor CEO Ari Emanuel would handle his first earnings call as a public company officer, the wait is nearly over. Endeavor is set to report its second-quarter earnings on June 2.
The company’s profile has grown outside of the entertainment industry now that it is publicly traded. Investment banking giants J.P. Morgan, Morgan Stanley, Jefferies Group and Evercore ISI Group initiated coverage of the company earlier this week.
“We have had a healthy dialogue with management team over the last few months. Particularly in the live-events business and the representation business, you are seeing very strong growth in ’21 and ’22 as these segments really rebound from virtually being at a standstill,” said Alexia Quadrani, senior media analyst for J.P. Morgan, which was an underwriter of the IPO.
Endeavor shares debuted April 29 on the New York stock exchange, about 18 months after the company first sought to tap the public markets for capital. Endeavor bowed out at the last minute in September 2019 due to lackluster demand for shares amid a frosty market for IPOs at the time. Conditions have warmed considerably in the intervening months, despite the pandemic. The year to date has seen more than 400 initial public offerings, compared to more than 400 for all of 2020 (which set a new record) and around 200 in 2019.
Endeavor’s stock price briefly dipped below $24 on the first day of trading but rallied to closed that day at $25.20. The stock has not gone below $25 since April 30. The high so far has been $33.20, reached on May 14. On Friday, shares closed at $29.65, a 4% gain from the previous close.
Earlier this week, J.P. Morgan gave the stock a Neutral rating and set a $34 price target for shares by year’s end. Jefferies gave the shares a Buy rating with a $40 target. Evercore ISI Group went for Outperform with a $35 target. Morgan Stanley set the target at $30 with an Equal-Weight rating.
Quadrani said Endeavor’s bounce has been fueled by optimism around UFC, the MMA giant that is now 100% owned by Endeavor, a transaction done to improve its standing with investors. This time around, the timing of Endeavor’s debut on Wall Street worked in the company’s favor as it coincided with UFC returning to full strength with fans in arenas with its April 25 UFC 261 event in Jacksonville, Fla.
“Owning 100% of UFC makes a big difference,” Quadrani said. “That’s a tangible asset with very healthy growth ahead. It’s got good visibility with its ESPN contracts” for pay-per-view and streaming bouts. “You do have better visibility and a growth story than the last time they tried this,” she said. The fact that Disney executives touted UFC’s recent performance on ESPN and ESPN Plus is a big plus for Endeavor.
Investors will have an appetite for Endeavor shares even though profits and dividend payments are not on the near-term horizon. Endeavor’s biggest challenge in the coming years is to manage its cash burn and its heavy debt load. The debt level disclosed next week will be telling as the company has pledged to use part of the $511 million raised through the IPO to chop down the $5.9 billion in red ink on its books as of December 2020.
“Over time, as the company continues to de-lever and execute on its financial projections, that will shape the dialogue around it,” Quadrani said. “I think they are well positioned to deliver robust growth in the near-to intermediate term. Further out, visibility becomes less clear.”
Endeavor’s IPO is notable for Hollywood because it is extremely rare for talent agencies like WME and IMG to be exposed to the ups and downs of quarterly earnings reports. The unpredictability of the agency business — where clients and top agents can walk out the door at any time — has always been seen as anathema to investors who prize predictable revenue streams.
But with the cornerstone of UFC and myriad live events — from Professional Bull Riders to the Miss Universe competition to lifestyle, fashion and food festivals — Endeavor is seen as a hybrid between a media stock and a live event player a la Live Nation or WWE.
For now, Quadrani sees Endeavor’s solid post-IPO performance as a sign that the market is giving the company the benefit of the doubt that it can deliver on its blend of sports, talent, content and live events in a post-COVID environment.
Endeavor shares “are up notably more so than the broader market,” she says. “There’s definitely some optimism out there reflected in the stock price.”
(Pictured: UFC fighters Conor McGregor and Dustin Poirier)