*This is not financial advice* Sorry for the long post 🙂
The Business
Formula 1 holds exclusive commercial rights to the FIA Formula One World Championship, an annual, approximately nine-month-long competition in which teams compete for the Constructors’ Championship and drivers compete for the Drivers’ Championship. During this competition, 10 teams field 20 drivers over the course of around two dozen races across the globe.
The 2021 F1 season saw 23 races take place in 21 countries across 5 continents. The Circuit of the Americas (Austin, TX) saw the largest crowd turnout with 400,000 fans, with Mexico (371k) and Great Britain (356k) close behind. Over the course of the season, F1 broadcast to a cumulative audience of 1.56B, with 445M unique TV viewers.
Revenue
Formula 1 makes money through 3 main channels: Media rights (~40%), race promotion (~31%), and sponsorship (~16%). Extra revenue comes from a variety of sources, such as freight services for member teams, F2 and F3 operation, and operation of race-day hospitality clubs. Media rights encompass the licensing of broadcasts and content to free-to-air networks (ESPN, Fox Sports, etc.), and paid content (F1TV, their own subscription broadcast). Race promotion typically consists of government bodies or local circuit owners paying as part of multi-year agreements to host an F1 race at their location. *this is an important fact: F1 profits from the operation of the actual race – unlike NASCAR, they do not rent tracks, but rather show up to a venue paid for by the local entity hosting the race. Finally, sponsorship incudes official partners, global suppliers, etc – the ads you see most on tv during the race. Many of the sponsorship agreements have clauses to increase price annual based on things such as US/EU CPI data, to keep payments consistent with rising inflation.
Fans
The most important aspect of any entertainment company is a healthy base of people who enjoy consuming their content. I believe that this is F1's greatest strength. As a truly global sport (teams based in 6 different countries, drivers from drivers encompassing an additional 10 countries, and races taking place in 21 countries), Formula 1 has an endless supply of new fans and markets to tap into. Examples of this include introductions of 1 Chinese and 1 Japanese driver for this current season. Similar to soccer, this gives fans great variety of teams and drivers to relate to and support.
Netflix's Drive to Survive series, a wildly successful annual show that follows the action behind the scenes, provided a huge boost in viewership and interest among the most vital fan demographic – the younger crowd. The average fan age in 2021 was down to 32 vs. 36 in 2017. The impact of this show can not be understated as a younger average fan base gives the sport great future outlook (again in contrast with NASCAR). If we look at the Twitter follower count from 2016-2022 (Not a perfect metric of course, but provides interesting insight), we see that F1 is far outpacing the main sports entertainment leagues.
We can see from this graphic that F1 is much closer to the Champions League in popularity growth, I believe in large part due to its international nature. This dramatic rise in popularity will (and has) become a direct catalyst for F1's bottom line. More fans means more leverage in media deals, more opportunities for merchandise sales and the like, and more cities around the world wanting to bid to host a race. With an excess of cities wanting to host a race, this puts F1 in the drivers seat to choose the most advantageous and strategic locations. For example, within the past 2 years they have announced new races in Miami and Las Vegas in order to capitalize on the large and untapped American market. They also possess great flexibility – they did not hesitate in cancelling the Russian GP earlier this year due to the war, as they have plenty of other options to fill the void if needed in the future.
See below for US fan growth:
Broadcasting
Speaking of the leverage gained in negotiating media deals, this is where F1 is poised to make the largest leap in revenue generation. The graph below shows the approx. broadcast revenue generated by major sports leagues in 2019 compared to their approx. revenue in 2022. *Some of this data was hard to find and may not be accurate*
With many in the entertainment space seeing significant increases in their renegotiated media deals due to the Covid bump in viewership, F1 is posed to make a massive splash in the wake of their popularity surge. Think of all the new players to the market – Apple and Amazon bidding incredible amounts for Thursday Night Football, Netflix potentially entering the streaming market, and classic powerhouse networks like ESPN/Fox Sports/Sky. These companies are all ready to spend large amounts to secure content that fans will watch (made more evident by the recent deals announce for Pat McAfee and Tom Brady in a similar space).
Exclusivity
Exclusivity goes hand in hand with branding, which I believe is another of F1's major strengths. Exclusive might be the best word to sum up Formula One as an organization. Starting with the drivers, it is notoriously difficult to find your way into a seat. With only 20 drivers at a time, fans are more in depth with story lines and in-tune to major changes and shakeups. In contrast, how often do you watch an NBA game where you can't name all 5 starters on each team. These 20 drivers belong to 10 teams – a number approved by F1. Any new entrant into the sport has to pay a dilution fee (since revenue is split up among the teams) of ~$200M. This has not slowed the interest of potential teams with VW (Porsche/Audi) rumored to be making an entrance in 2026, and racing legend Michael Andretti applying to start a team in 2024. Finally, race exclusivity is why we see such high fan turnout. With on average one race per country, per year, fans pay high prices and take lengthy journeys to see their home country's race when it comes by. This is a model opposite to that of the MLB, which play in front of half filled ballparks regularly.
In similar fashion to the races, this exclusivity allows F1 to be strategic with its teams, drivers, and partner venues. For this reason, the current teams are made up of many iconic brands that bring further attraction to the sport – Ferrari, Mercedes, Red Bull, Aston Martin, McLaren, etc.
The Stock
The Formula One Group is a subsidy of American conglomerate Liberty Media. Liberty Media itself is not a ticker, but instead, the company has divided its' holdings into three independent tickers meant to track the independent business units within the company. In essence, Liberty keeps its holdings as separately run entities, with a board and CEO that oversee all three. Liberty Sirius XM trades under $LSXMA/B/K, the Braves MLB team trades under $BATRA/K, and the Formula One Group trades under $FWONA/K. Liberty Media files financial info for these companies under the same documents, but splits up assets, liabilities, revenue, etc. as though they are totally independent businesses. The groups are linked slightly through holdings in one another. For example, Formula One also owns 11% of the Braves organization.
What I am going to do next is step through some basic fundamentals before judging the stock's value.
Balance Sheet (FY2021)
Looking at the balance sheet above, there are two things that I want to point out. First, Formula One Group has over $2B in cash on hand, up from $1.6B in 2020. Their total current assets comprise almost 200% of their current liabilities, and nearly covers 75% of their long term debt. At a first glance the company is set up to handle market fluctuations or poor economic conditions very well. This cash balance was increased due to Liberty Media selling its 6.11M shares of AT&T to pay down debt and accredit leftover cash proceeds to F1.
Cash Flows
Continuing on to another important topic for valuation – how much free cash does the company generate? If you don't know, free cash is the money leftover after CapEx for the company to do… whatever: Pay dividends, repurchase shares, finance new ventures, etc.
2022 1Q*: 125M 2021: 392M 2020: -165M 2019: 245M 2018: 260M 2017: -97M 2016: 376M
Cash flow generation is generally positive, growing at a decent rate, and on pace to jump to new highs. FCF for 1Q 2022 as a percentage of revenue is ~34.7%, a huge increase from 18.4% in 2021.
Liberty Media is also in the final legs of its $1B share repurchase program ($257M remaining). In the past 6 months, $92M of FWONA was repurchased under this program.
Valuation
Everyone reaches a company's fair value differently. Based on current economic conditions, this judgement is even more difficult. This is how I reached my valuation (not a Finance student, or expert in any way). Cash on hand minus current liabilities is good for $4.62/share. Estimated free cash flow at a 20x multiple is $43/share, giving a value of ~$47/share or about an $11B valuation. So, the question is – does future growth opportunities, new media deals, and a larger, younger audience justify a $3B premium in the company valuation? I will leave that for you guys to tell me your opinions :). Thanks for reading!
If there is anything you disagree with, I would love to hear your suggestions in the comments below! Again, I am not an expert, just some moron typing this out for fun to provide an analysis on a lesser-known stock and share some graphs that I made.
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