Formula One (NASDAQ:FWON.K) is the commercial rights holder of the Formula One World Championship, the most prestigious motor racing competition in the world. Formula One shares have raced to all-time highs in recent years.
The company’s stock price has more than doubled since its IPO in 2017, and its revenue has grown by an average of 7% per year. This growth is being driven by the increasing popularity of Formula One racing as well as the company’s efforts to expand into new markets.
Could it be a good investment?
For those considering an investment in Formula One shares, there are a few things to know. It’s important to understand the growing demand for Formula One racing. The sport is currently enjoying a period of unprecedented popularity. This can be attributed to the rise of social media and the increasing global reach of Formula One. The International Motoring Federation (FIA) estimates that there are over 400m Formula One fans worldwide.
Second, investors should be aware of the structure of the Formula One race calendar. The season consists of a total of 22 races, which are held in a variety of countries around the world. This gives Formula One Group a global reach, and it helps to ensure that the sport remains popular. It is also investing in new technologies, such as augmented reality and virtual reality.
How are the fundamentals?
Formula One became profitable this year. The price-to-earnings (P/E) ratio of 35.1 times is slightly below the average of the entertainment sector at 46.3 times, although it should be noted this is still high. A discounted cash flow calculation suggests the shares may be 36% undervalued at present, with a calculated fair value of $53.47.
The expected earnings growth is about 4% over the next few years, significantly below the sector average of 29%. The expected return on equity (ROE) is also rather low at 7%. These values suggest that a large amount of the growth period has already happened. It is possible that a period of relative share price stability, or decline, may be ahead.
What are the risks?
The sport is still relatively niche, and it’s possible that the popularity of Formula One could decline in the future. Additionally, the company faces competition from other motorsports, such as NASCAR and MotoGP, as well as eSports.
The company also has a fairly large debt of $3bn. This currently appears under control, but if interest rates remain high, and revenues decline in the event of a recession, investors may get concerned.
My major concern is about the severity of inside selling from the management team. In the last year, the company’s executives sold over $37m in shares. This may be unrelated to future performance, but does not inspire confidence in new investors.
Am I buying?
Formula One shares have been a tremendous investment over recent years, with investors seeing fantastic returns amid the growing interest in the sport. However, I feel like the best growth in has likely already happened. Unless the share price declines significantly below the calculated fair value, I will not be buying any of the shares for my portfolio.