Shares of the renowned sports entertainment company World Wrestling Entertainment (WWE) have gained 33.2% over the past three months, 30.1% over the past six months, and 46.2% over the past year to close its last trading session at $91.26. Short interest on the stock has been elevated lately, buoyed by the speculation of acquisition talks, setting it up for sharp fluctuations in share prices.

Despite the possibility of another short squeeze, it could be wise to avoid this fundamentally weak entertainment stock. In this article, I have discussed several reasons why investing in this stock could be highly risky.

It has a short interest of 9.08 million and a short float of 21.1%. Short interest above 20% signals significant pessimistic sentiment and heightens the probability of another short squeeze.

Short interest in WWE has recently been exceptionally high amid multiple suitors expressing interest in acquiring the company. Today, WWE and Endeavor Group Holdings Inc. (EDR) signed a definitive agreement to form a new, publicly listed company comprising two iconic, global sports and entertainment brands: UFC and WWE.  

Upon completion, EDR would hold a 51% controlling interest in the new company, and existing WWE shareholders will have a 49% interest in the company.

Nevertheless, the proposed acquisition’s success hinges on the merged entity’s ability to demonstrate impressive synergies, which could potentially entice investors. If the projected outlook for the newly formed company falls short of expectations, it could lead to a significant future risk for WWE shares. 

Here are other factors that could affect WWE’s performance in the upcoming months:

Disappointing Financials

For the fourth quarter that ended December 31, 2022, WWE’s adjusted operating income decreased 10.2% year-over-year to $72.40 million. Its adjusted OIBDA came in at $90.20 million, a 4.2% decline year-over-year. The company’s adjusted income before income taxes declined 3.7% from the prior year’s quarter to $69.90 million.

Moreover, WWE’s adjusted net income decreased 19% year-over-year to $45.10 million, and its adjusted EPS came in at $0.52, down 22.4% year-over-year. As of December 31, 2022, the company’s total liabilities stood at $838.40 million, compared to $829.50 million as of December 31, 2021.

Stretched Valuation

In terms of forward non-GAAP P/E, WWE is trading at 34.14x, 116.8% higher than the industry average of 15.75x. The stock’s forward EV/Sales of 5.16x are 166.7% higher than the industry average of 1.94x. Also, its forward EV/EBITDA of 17.18x compares with the 8.38x industry average.

Furthermore, WWE’s forward Price/Sales multiple of 5.05 compares with the industry average of 1.24. The stock’s forward Price/Cash Flow of 24.14x is also 188.8% higher than the 8.36x industry average.

Unfavorable Analyst Estimates

Analysts expect WWE’s EPS to decrease 46.5% year-over-year to $0.41 for the first quarter that ended March 2023. The company’s revenue for the same period is expected to decline 12.1% from the prior year’s period to $292.93 million.

POWR Ratings Reflect Bleak Prospects

It’s no surprise that WWE’s overall D rating translates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. WWE has a D grade for Value, in sync with its higher-than-industry valuation. Also, the stock has a D grade for Growth and Sentiment, consistent with its underwhelming financial performance in the last reported quarter and unfavorable analyst expectations.

WWE is ranked #10 within the F-rated 16-stock Entertainment – Media Producers industry.

Click here to access the additional Quality, Stability, and Momentum grades for WWE.

View all the stocks in the Entertainment – Media Producers industry here.

Bottom Line

World-famous sports entertainment stock WWE witnessed a considerable rally recently due to high short interest amid the company’s increased interest from multiple suitors. Today, WWE and EDR agreed to a massive merger, but there is uncertainty if the newly formed company would meet the potential deal synergies.

Given WWE’s weak fundamentals and a tough macro environment, we think it could be wise to steer clear of this entertainment stock now.

Stock to Consider Instead of World Wrestling Entertainment, Inc. (WWE)

The likelihood of WWE outperforming in the upcoming weeks and months ahead is significantly compromised. However, one could check out other entertainment stocks with impressive POWR Ratings. So, consider these B-rated (Buy) stocks instead:

Vivendi (VIVHY)

Cedar Fair, L.P. (FUN)

Emerald Expositions Events, Inc. (EEX)

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WWE shares were trading at $86.49 per share on Monday afternoon, down $4.77 (-5.23%). Year-to-date, WWE has gained 26.42%, versus a 7.52% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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