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Time to Race Into Formula 1 Stock?

consumer discretionary Oct 13, 2022

Price Target: $78 (27% upside)

Current Price: $61

Target Date: Q3 2023

Rating: Overweight

The last time we discussed Formula 1 was in the spring when they first started taking over your entire social media page.

While the hype has slowly settled down, mostly because their show is in between seasons, the company behind it all is still growing faster than ever.

And after recently resigning with a massive broadcaster (that represents ~45% of their revenue), we analyzed the new deal to see if we needed to change our projections.

Spoiler Alert: If anything, we're now even more bullish than we were 6 months ago. 

So let's get into the details 👇  


Formula 1 Overview:

In case you missed our first analysis on them or are not familiar with Formula 1 -- we definitely recommend checking out our original video.

This video will help highlight what Formula 1 is, their growth plan, and what's coming next.

But if you previously watched it or just watched it now, then you should be up to speed (no pun intended).

And now that we're on the same page for the long-term thesis for Formula 1 -- let's discuss why they're are perfect play right now amidst a very shaky macro backdrop.

Formula 1 Timing:

Formula 1 couldn't have timed it better if they tried. Rewind just a few years ago and Formula 1 wasn't on a lot of people's radars.

But fast forward to today, and you'd be hard-pressed to find someone who hasn't at least heard of Formula 1 -- in some capacity.

And this transcendent growth couldn't have been timed better going into what appears to be a recessionary period for the global economy. And that's because Formula 1 has two strong things going for them:

  1. F1 just locked in a long-term contract with a broadcaster who represents over ~45% of their revenue. We'll discuss more on this below but by signing this deal through 2029, F1 will be able to mitigate "any risk" associated with a global recession.

  2. F1 is hosting a record high 24 races in 2023 -- with the number likely to increase in future years. This is because the competition among host cities for F1 races is extremely popular -- giving them strong negotiating power. On top of this F1, for the first time, is starting to host and promote their own races, which will own further boost profits (more on this below).

But let's double-click into each of these points.


Formula 1 Broadcasting Contract:

As we just mentioned, F1 just locked up a major contract with Sky Television. This deal secures their broadcasting rights in Italy/Germany through 2027 and the UK/Ireland through 2029.

While the terms of the deal were not disclosed, there are still 2 major takeaways:

  1. The first is that F1 likely won this side of the deal. This is because the deal with Sky was not set to expire at the end of this year. And with F1 growing so quickly, an early deal secured through the end of the decade signals that Sky had to have paid up big time in order to win this contract. Therefore, based on comps and prior deals, we believe that the UK/Ireland portion alone is likely worth somewhere north of $220 million per year. 

  2. The second is that the revenue from the American markets is going to see a massive increase come 2026. We know this because when we look at the American markets, we see that they just inked a massive deal with ESPN earlier this summer. This deal pushed their contract with ESPN from $5M a year to over $85M per year. Yes, you just read that right -- the deal increased by 1,600%!

    • But that's just the start of it. Given the deal with ESPN only lasts 3 years, we believe that in 2026, F1 will be in an unreal position to push those contract values even higher as we see tech companies like Amazon enter the streaming space via their new deal with the NFL. Pair that with several more years of their Netflix show, and F1 is looking at a massive renewal opportunity come 2026.

And this is just tailwind number 1. There is still another strong factor that is pushing F1 above our original projections. And the next one we want to discuss is their upcoming race schedule and the economics behind it.


Formula 1 Race Schedule:

Due to its global popularity, F1 has been increasing the number of races they hold every year for the last 4 years -- with the total number of races to hit an all-time high next year.

And on average F1, makes about $100 million to $140 million per race. So more races = more money. Makes sense.

However, two things have changed over the last few years. The first is that because F1 has become so popular, cities are paying F1 more money than ever for them to choose their city to race in.

And the second thing that has changed is that for the first time ever, F1 is changing the way they host races -- starting with the Las Vegas Grand Prix.

During this race, F1 is going to promote it themselves which is a big deviation from what they've done historically. While this does come with more risk because of the upfront capital needed to support the promotion, it ultimately comes with a higher potential reward as F1 will see a higher ROI during this race.

If done successfully, we see this opening up a higher margin race system -- wherein owner-operated races change their financial outlook for the better.

That's because for the Las Vegas race, this will present them with the opportunity, for the first time, to monetize the race outside of pure ticket sales. They can partner with local hotels and casinos along with a handful of other businesses in order to juice profits even further.


Formula 1 Outlook:

And while all of this is promising, the true backbone of F1 is its differentiated, consistent, and unique content.

Over the last few years, original content platforms have shown to be more valuable than almost any other asset. As we mentioned before Amazon, Apple, and other tech companies are jumping at the opportunity to be able to secure unique & differentiated content like this.

And past streaming, we see YouTube, TikTok, and other platforms, flourish in popularity due to the original content being pushed onto their platforms.

And that's why we believe racing content, like this, is differentiated enough to be the backbone of F1's defendability over the years to come.

Therefore, we're increasing our projections for F1 and believe their upside is higher than we originally anticipated.

While their shares continue to trade in the low 20s of EV/EBITDA, we believe this range will both skew higher once interest rates decrease as well as once F1's EBITDA starts hitting our projections.

Once we get closer to 2026 and beyond, we believe F1's stock will then be able to enter into its next phase of growth, which should unlock significantly higher upside.

But until then our price targets are projected for the next year and we will update you as we move forward into the future!


Risk/Reward: Medium / High

Ticker: FWONK

Market Cap: $28B

Dividend Yield: 0%