Deep Dive: Formula One
(Ryan) What they do: It’s a tracking stock of Liberty Media who owns Formula one. The formula one company holds exclusive rights to the Formula One World Championship, which is basically a sports league. That’s the way I view the company.
Formula one conducts a 9 month long season that holds roughly 20 or more races/grand prix’ around the globe. And the league is home to ten teams and 20 drivers. The teams include Ferrari, Mercedes, Red Bull, McLaren, and several others. They compete for two championships, the drivers’ championship and the constructors’ championship. And each Grand Prix provides points towards these trophies.
Formula 1 generates revenue through race promoters, broadcasting rights, and ads/sponsorships. The biggest payout/cost for the company is the team payout. Teams get a budget/allocation money from the league and they get prize money for winning.
The ultimate objective is to simply increase viewership. If they increase viewership, they’ll increase revenue which means more profits and cash flow.
(Ryan) History: Grand prix motor racing across Europe really started in the 20’s and 30’s. And the Formula part is basically the set of rules that the cars have to follow, and after World War 2, Formula 1 was created. The first world championship took place in 1950 in the UK. The company just celebrated its 70th anniversary of that. In the early days, the big manufacturers that competed weren’t that dissimilar from today, Ferrari, Alfa Romeo, Mercedes, and Masserati. They’d all competed before the war, but obviously the battles took priority and put the races on pause. Right after they formalized it and started what is now Formula 1.
Fast forward a few years, and between 2000 and 2015, Formula one struggled and was plagued by political controversy like intentional crashes and stuff like that. Liberty Media which is run by Greg Maffei and which John Malone serves as the chairman for, acquired a controlling interest in Formula one in early 2017. After the acquisition Liberty Media helped install a budget to make the competition more competitive. Previously it was always the same team winning which resulted in less viewership because it wasn’t as competitive, but by adding more restrictions it levels the playing field.
According to F1, in 2019 it hit almost 1.9 billion views across platforms in that season, the highest since 2012
Top markets are Brazil, Germany, Italy, UK, Netherlands
2020 saw a 10% dip in viewership
Hard to quantify competition for a unique asset like this. Possibly NASCAR or Indy Car or Moto GP but they are all different sports so hard to tell
Some other things investors could track that may or may not mean anything for the company: Instagram at 13.3M followers, Twitter at 5.7M followers, YT 5.48M subs
(Ian) Management and Ownership:
The Chairman of Liberty Media group is John Malone
The company’s CEO is Greg Maffei
Own stakes in a variety of ventures including Formula 1 (100%), atlanta braves, indycar team, at&t, sirius xm,
3 tracking stocks: Braves Group, Liberty Sirius XM Group, Formula One Group
Formula 1 stock includes 11% of the braves, clear, drl, formula 1, pad tec, inrix, ball arena in denver, 20% of its own spac, indy car team, tastemade.
Formula 1 ceo was initially chase carey following the acquisition, but Stefano Domenicali was just made ceo in january 2021
Stefano was the team principal of ferrari from 2008 to 2014 and the ceo of lamborghini from 2016-2020
Carey was an outsider, but made well-regarded efforts to level the playing field in the sport
Stefano “knows the sport inside and out”
Market cap of $9.34 billion, ticker FWONA/B/K (not doing the blended market cap for the pod, just going off of the FWONA price. EV ends up similar though)
EV of $11.3 bil
All 2020 valuation ratios are screwed up due to COVID-19, not really betting on TTM multiples
Based on 2019 income statement:
EV/rev of 5.6
EV/OCF of 38 (using Koyfin, they use OIBDA)
EV/OIBDA (Liberty’s internal metric) of 23.4
The big question is if/when financials return to 2019 numbers
(Ryan) Earnings: 2019 fiscal year to give normalized numbers
$2B in revenue, up 11% from 2018
$450M in adjusted OI, up 20% from 2018
Operating cash flow was about $300M
Giving them an OCF margin of 14.5%
The company has about 31% gross margins, because like Spotify, a lot of the revenue gets paid out to the teams in the league.
Almost $450M in depreciation and amortization costs. Hard to tell what that was from, and they didn’t really break it out. Pay attention to free cash flow
Not a whole lot in SBC
Had 21 events in 2019. Expecting 23 in 2021.
(Ian) Balance sheet and liquidity:
Cash of 1.7b
Goodwill and other intangibles of nearly 8 billion
Debt of 3.55 billion
Mostly term loan at 3.5% interest rate (tied to LIBOR, but have interest rate swaps) also convertibles at less than that, does not look like they will convert
Significant amount of debt, and only 2x ebitda/interest expense. Works if ebitda is steady, but definitely levered
Product Experience/Anecdotal Evidence:
(Brett) Loved the Netflix doc. Friends, family, people on Twitter and even fintwit talking about the sport more.
(Ryan) Iconic brand globally. The history/culture around it makes it difficult to ever uproot or replace. It’s kind of like Ferrari in that way. They were a first mover in the motor-sport racing category and they’ve been at the top of the class ever since.
(Brett) Very strong competitive advantage over other F1 style racing leagues due to history, rights, scale. Without quantifying it, think of it like other sports Football, Soccer, or Basketball and the professional leagues. Really, really high switching costs for all associated. The big question in my mind is durability/growth of the industry, not the moat.
(Ian) Adrenaline. This is kind of a bizarre one, but I think its real. I watched the first couple minutes of the netflix series and saw cars zooming by. The sounds, the imagery, the drama, it’s exciting. This is not entertainment that will lose its luster, especially as they continue to innovate.
Future growth opportunities:
(Ryan) Getting a Chinese driver into F1. (Find me value talked about this as a growth opportunity in his slides). This could spur a lot of adoption of Formula One across China since it gives Chinese consumers sort of a home team to root for. Guanyu Zhou is currently in F2, and he’s working to secure his license to drive in F1. More viewers means more revenue.
(Brett) Making moves into the United States. A race is coming to Miami in 2022 with a 10 year agreement, and the Netflix series is creating a rapidly growing fanbase in the country (Barstool and Ringer getting into it bringing the extra growth). This is hard to quantify but the sport is definitely growing in the United States right now
(Ian) Content machine. Netflix documentary is a great start. Podcasts, movies, e-sports, merch, even gambling/fantasy. 273k participants in 2020 pro series qualifying rounds of formula 1 esports tourney. Jumped up to 494,000 in 2021.
Highlights and lowlights:
(Ryan) Highlights: Super unique and well-run. It’s a business that’s enjoyable to be a part of and Lowlights: Operating leverage is kind of hindered for a few reasons. They can’t just add a bunch of races because it makes it tough on the teams. They can’t add more teams because it diminishes the value/prestige. And the teams will always command a claim to the league revenue, a lot like how artists and labels do it on Spotify.
(Brett) Highlights: growing brand with minimal competition, new Concorde Agreement, growth of the sport in the U.S, and growth of sports broadcasting rights around the globe, getting a Chinese driver Guanya Zhou on to the Grand Prix could help grow the sport in the region, F1 TV going DTC, they did a short deal with ESPN that can now be renegotiated with growth of Drive to Survive and Miami. Lowlights: There is a ceiling on the growth of the sports league, as an investor, you’re possibly just hoping for low growth but in a permanent asset that will continually buyback shares
(Ian) Highlights: The sport and excitement of it. If the sport were to expand to US and China, potential upside in those markets, content machine. Steady growth with upside potential. EBITDA margins of 20%, forecasted to grow to 26% by 2023. Lowlights: Debt, seems potentially risky if EBITDA ever declined. Sport might not catch on in China/America, could mean best days are behind it (seems unlikely though)
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Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.