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World Wrestling Entertainment (WWE) has had an interesting year. In fact, the integrated pro wrestling exhibitor is in the midst of a dramatic transition as it enters full-bore into the digital media market. After announcing and releasing its over-the-top online distribution platform (the WWE Network) earlier this year, the company’s stock jumped above $30 before several factors led to an eventual, dramatic fall back down to its recent levels. Even though costs related to the ongoing rollout and promotion of the Network may hold back some of its near-term profit growth, the company is nonetheless aligning itself early with the evolving media landscape. In the meantime, it will need to continue to improve its on-screen products and exhibit exceptional cost controls as it attempts to grow into this new digital frontier.

So, which types of investors are best suited for the company’s stock? In this article, we will attempt to address that question by taking a brief look at World Wrestling Entertainment’s business and performing an easy-to-follow SWOT analysis of the company, evaluating its Strengths, Weaknesses, Opportunities, and Threats.

Business

Today, World Wrestling Entertainment is anything but a pure wrestling company. It derives its business from a variety of integrated revenue streams, including hundreds of live events per year, lucrative broadcast licensing agreements, assorted lines of merchandise, in-house and joint-venture film production, and, more recently, its own online distribution platform.

To understand the history of WWE is effectively to understand the history of professional wrestling. Its growth from a regional entity into an international media company is characterized by three major boom periods tied directly to technological advances. Over 30 years ago, Founder, CEO, and majority shareholder Vincent K. McMahon aggressively pursued the hostile takeover of a majority of established regional territories and formed a united, national-based federation. With this widened scope, he made wrestling a national phenomenon in the mid-1980s through the then-cutting edge method of pay-per-view television distribution, buoyed by the popularity of its biggest star, Hulk Hogan. About a decade later, he inked a national cable deal to air a weekly program titled Monday Night Raw, which eventually led to the late-1990s boom period, characterized by reality-tilted storylines with brash heroes and offensive villains. Now, the company enters a new frontier with the WWE Network, an ostensible attempt to better monetize its popularity on a technologically forward, straight-to-consumer platform.

All told, we think much of the company’s future relies on the recently launched service, but only time will tell whether or not its most recent gamble ultimately pays off for the company and its shareholders.

Strengths

Technology

Any evaluation of World Wrestling Entertainment’s value begins with the aforementioned Network. Launched earlier this year, the platform is both an on-demand streaming service and a pay-per-view distribution. For a base rate of $9.99 per month, it includes what amounts to a time capsule of wrestling footage dating back nearly 50 years, as well as monthly special live events (formerly called “pay-per-views”). The Network is a major leap for the company, as the inclusion of the monthly events on the platform will effectively cannibalize one of its most reliable revenue streams.

The upside of the Network is that WWE broke free from broadcast television’s virtual stranglehold on a significant portion of its revenues. Going forward, the company will receive money directly from consumers on a monthly basis. To cover the loss of pay-per-view revenues, the service needs 1.3 million subscribers. And while it remains short of its subscription goal, several strategies (discussed later) should help to support the Network’s eventual success.

Brand Integration

Aside from its benchmark events like WrestleMania and Raw, the World Wrestling Entertainment brand growth exists primarily in its wrestlers or, in company parlance, its Superstars. Through its storylines, monthly special events, videogames, toys, and a variety of other mediums, the sports entertainment purveyor cultivates these figures into their own brands under the WWE umbrella. John Cena, the de-facto face for the current generation of WWE programming, as well as a lucrative partnership with Sears Holdings Corp.’s (SHLD) K-Mart, boasts more “Likes” on Facebook (FB) than any other athlete. A handful of WWE performers possess Twitter (TWTR) followings totaling in the millions. Its Superstars can be seen in WWE-produced feature films, as well as WWE-produced television series like Total Divas on the E! Network. WWE’s reach into different mediums is considerable, and is supported by a unique central product with no real direct competitor. The challenge for the company has been converting its brand equity into sales growth, as the top line has grown a meager 1.5% over the past decade.

Weaknesses

Singular Leadership

In the company’s filings, it lists “the unexpected loss of the services of Vincent K. McMahon” as one of its major risk factors. Since the company’s modern inception several decades ago, he has overseen nearly every major business and creative decision the company has made. As he gets older, speculation has arisen regarding the executive direction of the company after Mr. McMahon steps down. While his daughter Stephanie will likely keep company control in the family, the long-term outlook of a WWE without Vince McMahon at the helm is an uncertain one. On the other hand, this singular rule poses an interesting problem for some investors. McMahon’s substantial control of the company’s Class B shares limits the say that Class A shareholders possess. That is to say, if shareholders want to initiate an acquisition, sale, or other action, it very literally needs Mr. McMahon’s seal of approval. This structure can often undermine the opinions of other shareholders.

Network Execution

As it jaunts into relative uncharted distribution territory, WWE faces a number of challenges surrounding the rollout of the Network. Technologically, the move is a costly one. Expenses related to the service’s release and promotion figure to rise in the next few years, so attracting subscribers is vital to near-term profit growth. One major flaw with the company’s initial Network subscription guidance is how it qualified its target customers. When it announced its intention to launch the service, WWE broke down its strategy. Of the 52 million American homes that “pay attention” to the on-screen product, 40 million are “casual” fans. Within the latter group, 13 million were said to be passionate. But, through June, barely 700,000 fans had signed up for the service. While the company’s figures overlooked several controls in its survey, the most glaring is the amount of money its core customers spend on their entertainment. WWE lags all the major sports leagues in this metric, due to a combination of average age and income. The monthly subscription fee is slightly higher than Netflix (NFLX), and might be too steep for some regular fans to shell out at this juncture in the popular media consumption.

Opportunities

International Growth

We think the company’s global presence is a long way from being monetized. That is, while the company hosts live events in six continents and broadcasts a version of its television product to over 150 countries, it derives less than a quarter of total revenues from international operations. Simply put, there remains a lot of room for growth. The company inked a record agreement with Candian-based media company Rogers Communications (RCIB.TO), which will air all WWE programming as well as host the Network as an on-demand app. With offices in London, Tokyo, Shanghai, Mumbai, and Istanbul, WWE is situated in a way that suggests the international customer base will be a major contributor in the future.

The Network will likely help address the apparent gap between exposure and capitalization; on August 12, WWE opened the platform for customers across 170 countries. In an effort to assure its global success, the company has also held public announcements featuring the signing of several high-profile talents from Japan and England, as well as legendary wrestlers-turned-ambassadors like Hulk Hogan and Sting over the past several months.

Acquisition Appeal

The entertainment industry is experiencing a wave of consolidation and speculation. Twenty-First Century Fox (FOXA) recently offered $80 billion for TimeWarner (TWX), which it has since rescinded. This unsolicited play serves as an indication that every company in the industry may be subject to merger consideration. Actually, part of the reason WWE stock shot so high up in February was the rumored interest the company garnered on the merger & acquisition front. Madison Square Garden (MSG) and AMC Networks (AMC) were both said to have considered an offer for the sports entertainment producer. Though it might be hard to imagine "Mad Men" and "Hell in a Cell" under the same corporate banner, WWE’s array of original programming, libraries’ worth of content, and its digital service make it a highly alluring consolidation candidate to many companies.

Threats

Public Perception

The company has experienced occasional, but significant, lulls in popularity over the course of its history, dually from lackluster on-screen products and unsavory off-script headlines. WWE saw its brand hit rock bottom in the early 90s, when it lacked young Superstars and showcased out-of-touch and cartoonish characters. Due to its reliance on its Superstars to grow the overall brand, the company opened a state-of-the-art training facility in Florida that will support the development of it wrestlers, announcers, editors, and many other aspects of its production.

WWE has also faced scandals that might influence its perception to non-fans and potential acquirers. From steroid investigations to the early death of a number of its performers, questionable content and offensive characters, WWE has done well with addressing many of these negative views. The company has implemented a stringent in-house wellness policy, offers healthcare and tuition for all former employees, and has generally distanced itself from the superhuman, bodybuilder prototype that ushered the sport into the national limelight during the 1980s. It has tirelessly sought to improve its public image, as it is at the forefront of concussion awareness and works year-round with a litany of local and national charities like Susan G. Komen and the Special Olympics.

Sports and Entertainment Competition

While the company’s brand of “sports entertainment” is unlike any other major pop culture institution, its mainstream exposure generally lacks that of its sports and entertainment competitors. While the Ultimate Fighting Championship overshadows the ostensibly “fake” WWE in the sports world, reality television and other, more lauded weekly programs steal away exposure on the scripted entertainment sphere. While it boasts high ratings on cable, a massive presence on social media, and a unique product to boot, the company is constantly struggling to attract new fans. The company switched all of its programming to a PG rating several years ago in hopes of attracting new fans, but in doing so may have also forced many other, demographically-valuable fans to switch to more mature programming. One of the hopes for the WWE Network is that it will bring back these lapsed fans, as well as inspire another surge in popularity for the sport itself.

Conclusion

The long-term outlook of World Wrestling Entertainment will become a lot clearer after the Network lands overseas. Depending on the success of its online platform, the company may enter into a new level of profitability. It could use this newfound capital to fund the on-screen product, or its film production studio in Los Angeles, or even to increase its quarterly dividend. It would help to support the cross-marketing of its Superstars of tomorrow, too. However, should subscription growth remain slow, then costs related to the support of it will invariably weigh on companywide operations. In August, the company announced a significant round of staff layoffs in an effort to free up money for the Network’s forthcoming international launch. Though prospects remain good for the professional wrestling empire, the challenges it faces in the near term require serious pause. Essentially, an investment in WWE represents a vote of confidence in its ability to grow its online platform.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.