FWONK - Liberty Formula One: The Formula For 2023 Is Promising

2023-03-11 08:48:36 ET

Summary

• Several factors are working in favor of FWONK, including rising sports media rights, increased opportunities for monetization, and more races per year.
• The addition of the Las Vegas Grand Prix and the upcoming F1 film are positive developments for the company.
• The future of F1 looks bright, and the sport is likely to continue to attract and retain a loyal and passionate fanbase for many years to come.

Summary

Many factors are working in favor of Liberty Formula One (FWONK), making it a good time to invest in it. These include rising sports media rights, more races per year, and increased opportunities to monetize existing properties (media, sponsorship, etc). In addition, as a result of a reattribution of assets and liabilities among other tracking stocks, FWONK now has more flexibility in deploying capital - with significant cash on hand for use in capital returns or growth investments. I think Formula One is the most rapidly expanding sport in the world, and this growth should fuel annual increases in EBITDA and free cash flow for the foreseeable future. The upcoming F1 film and the Vegas GP lend credence to this assumption, as do the underlying contracted revenues. For this reason, I see FWONK as a promising long candidate today.

Race promotion & Las Vegas

Aside from the addition of the Las Vegas Grand Prix, the return of Qatar, and the reduction of French races, the 2023 schedule is more or less similar to that of the previous year. In terms of expiration in 2023, I believe Belgium is the only country up for recontract, whose expiration was previously extended by a year. With regards to Belgium, I think the logical move is to negotiate for an extension to 2025, which will align the expiry of some other countries together. To increase the annual number of races, I believe management should keep looking for new regions. Countries and continents like South America and Africa are good examples. One more positive development is China, where I anticipate F1 to actively pursue a Shanghai event for the upcoming year. Since China is so large, I anticipate future managerial growth beyond its borders. All in all, I see plenty of growth opportunities for F1 in terms of regional expansion. Importantly, once a contract is won, it provides a stream of highly visible FCF, which would further support a premium valuation.

Given the transactional nature of the race in November in Las Vegas, I continue to believe that this is the biggest opportunity for an upside surprise in 2023. Management reaffirmed a revenue target near $500 million in the 4Q22 earnings, and they also provided details that the first year's economics would be in line with the top five race contributors. I think a revenue of $500 million is realistic, and maybe even low. The estimates of prices and fan attendance provided at the investors day could give investors a good idea of the potential for new revenue (my estimates surpasses that $500 million figure). Importantly, even if ticket sales don't quite reach expectations, there are several other revenue generation opportunities. Some examples of such revenue streams include sponsorship fees, product commissions, and sales of bundled services. Despite the fact that they are challenging to quantify, investors should account for them in their scenario analysis.

Longevity of F1

I think it's important to discuss how devoted and enduring the fandom for Formula One (F1) is. In my opinion, the F1 fandom will last for a very long time, just like any other major sport in the world. I believe the recent moves by management has resulted in an increase in fandom or awareness. These include the success of Netflix's Drive to Survive series, which has helped to introduce F1 to a wider audience, a more engaging and relaxed social and digital media policy, the rollout of F1 TV, an early resumption of races after COVID-19 lockdowns, the addition of new races, and an incredibly competitive 2021 season. F1's management is aware of the increased interest and is investing resources to improve the F1 TV experience, creating more interactive and engaging fan experiences, and increasing onsite activations.

For 2023, I believe the addition of the Las Vegas GP will further elevate the sport's profile, particularly in the United States. In terms of awareness, I believe the F1 film will increase interest in F1 around the world, though this will come likely in 2024. However, I believe that Formula One's biggest long-term challenge will be converting casual fans into dedicated ones (i.e. turning them into revenue opportunities). It's important to remember that the casual fan is not the same as the dedicated fan, and that they have worse unit economics as a result. Nonetheless, I think it's important for management to address the issue of the casual fan base.

Overall, I believe that F1 has a bright future and will continue to attract and retain a loyal and passionate fanbase for years to come.

Conclusion

I believe the outlook for FWONK looks promising due to several factors that are working in its favor. The expansion of sports media rights, increased opportunities for monetization of existing properties, and more races per year are just a few examples. The upcoming Las Vegas Grand Prix and F1 film also add to the positive outlook for the company. However, FWONK's biggest challenge will be converting casual fans into dedicated ones to maximize revenue opportunities. Nonetheless, the future of F1 looks bright, and the sport is likely to attract and retain a loyal and passionate fanbase for many years to come. I reiterate my buy rating.

For further details see: