On Friday, Pivotal Research initiated coverage on TKO Group Holdings (NYSE:TKO), assigning a Buy rating to the company's stock with a price target of $170.00.
The firm highlighted TKO as a distinctive asset, citing its control over the rapidly growing Ultimate Fighting Championships (UFC) and Worldwide Wrestling Entertainment (WWE) following their merger on September 23. The merger is seen as a catalyst for strong revenue growth opportunities for TKO.
The research firm pointed out that TKO's revenue growth is expected to be driven primarily by substantially higher media rights fees, which currently make up 65% of its revenue. This increase is anticipated due to the active participation of large cap tech companies in the competition for sports rights. Additionally, event revenue is projected to rise, bolstered by a strategic emphasis on location site fees.
Furthermore, TKO's advertising and sponsorship sectors are seen as currently under-monetized, presenting further revenue potential. The company is also exploring new revenue streams, including gambling, digital offerings, and an expanded subscription video on demand (S-VOD) service. Pivotal Research also underscored the company's cost reduction initiatives, which are expected to contribute to an approximate 15% compound annual growth rate (CAGR) in EBITDA from 2024 to 2027.
The analyst noted that TKO's growth will likely be augmented by low capital expenditure requirements and share buybacks, which should accelerate the growth of free cash flow per share. In the absence of acquisitions, the company is anticipated to utilize its robust free cash flow to aggressively repurchase shares.
The valuation of TKO by Pivotal Research is based on a discounted cash flow methodology, applying an 8% discount rate and a 17X '27 terminal EBITDA, which is moderately discounted compared to their 20X terminal EBITDA assumption for FWONK.
In other recent news, TKO Group Holdings has been making significant strides in the sports media rights field, as noted by Citi's reaffirmed Buy rating and a steady price target of $137. This follows the U.S. Tennis Association's extension of its U.S. media rights for the U.S. Open through 2026, which is set to increase the domestic rights fee for the event by approximately 2.2 times starting in 2026. Analysts anticipate a similar increase for TKO's Ultimate Fighting Championship (UFC) media rights renewal in 2026.
The company has also reported strong second-quarter performance, surpassing expectations and leading to an improved forecast for the full year. This positive financial performance has resulted in multiple analyst upgrades from firms such as Citi, BofA Securities, TD Cowen, and Jefferies.
TKO Group has also made strategic moves to consolidate its market position by merging its UFC and WWE Live Events teams into a single unit, the TKO Live Events Strategy Team. This move is expected to bolster TKO's presence in the live events market.
However, the company is currently facing a setback in a proposed $335 million class-action lawsuit settlement involving former UFC athletes. The court denied preliminary approval, delaying the resolution and prompting TKO to explore other options, including a possible appeal and separate settlement talks.
Despite these challenges, analyst firms maintain their positive outlook on TKO Group, suggesting a possibility for a new settlement before the trial date. These are the recent developments in TKO Group's journey.
InvestingPro Insights
As TKO Group Holdings (NYSE:TKO) garners a positive outlook from Pivotal Research, the InvestingPro platform offers additional insights that align with the company's promising trajectory. According to real-time data, TKO has an impressive revenue growth of 107.77% over the last twelve months as of Q2 2024, reflecting the company's strong performance post-merger. The stock is also trading near its 52-week high, at 95.27% of that peak, indicating a market consensus of its upward momentum. Furthermore, the substantial 42.37% price increase over the last six months underscores investor confidence in the company's future.
Two InvestingPro Tips that are particularly relevant to TKO's situation are the anticipation of net income growth this year and the expectation of sales growth in the current year. These tips resonate with Pivotal Research's projection of TKO's strong revenue growth opportunities following the UFC and WWE merger. Additionally, the moderate level of debt and the potential for profitability this year, as highlighted by InvestingPro, complement the research firm's emphasis on TKO's strategic cost reduction initiatives and low capital expenditure requirements.
For investors looking to delve deeper into TKO's financials and forecasts, the InvestingPro platform lists numerous additional tips, providing a comprehensive analysis that can help inform investment decisions. To explore these insights further, one can visit https://www.investing.com/pro/TKO.
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