Pivotal highlights media rights and free cash flow potential By Investing.com

On Friday, Pivotal Research initiated coverage on TKO Group Holdings (NYSE:TKO) and assigned a buy rating to the company’s stock with a price target of $170.00.

Analysts call TKO a unique asset, citing control over the fast-growing Ultimate Fighting Championships (UFC) and World Wrestling Entertainment (WWE) following their merger on September 23. This combination is seen as a catalyst for strong revenue growth opportunities for TKO.

According to Pivotal Research, TKO’s revenue growth is expected to be driven primarily by significantly higher media rights fees, which currently account for 65% of revenue. This increase is expected due to the active involvement of major technology companies in the competition for sports rights. In addition, an increase in event revenue is forecast, supported by a strategic focus on venue fees.

In addition, TKO’s advertising and sponsorship sectors currently have untapped revenue potential. The company is also exploring new revenue streams, including gaming, digital offerings and an expanded subscription video-on-demand (S-VOD) service. Pivotal Research also highlights the company’s cost-cutting initiatives, which are expected to contribute to a forward EBITDA growth rate (CAGR) of approximately 15% from 2024 to 2027.

Analysts note that TKO growth will likely be boosted by low capital spending and share buybacks, which should accelerate free cash flow per share growth. In the absence of major acquisitions, the company is expected to leverage its robust free cash flow for aggressive share buybacks.

Pivotal Research’s valuation of TKO is based on a discounted cash flow methodology, applying an 8% discount rate and 17x terminal 2027 EBITDA, which is moderately discounted compared to the 20x terminal EBITDA assumption for FWONK.

In other recent news, TKO Group Holdings has made significant progress in the sports media rights space, as evidenced by Citi’s affirmed Buy rating and a stable price target of $137. This follows the US Tennis Association’s extension of its US media rights for the US Open through 2026, with domestic rights fees for the event increasing by approximately 2.2x from 2026. Analysts expect a similar increase for TKO’s Ultimate Fighting Championship (UFC) media rights renewal in 2026.

The company also reported strong second-quarter results that exceeded expectations and led to improved full-year guidance. This positive financial performance led to several analyst upgrades from firms such as Citi, BofA Securities, TD Cowen and Jefferies.

TKO Group has also taken strategic steps to solidify its market position by combining its UFC and WWE live events teams into a single entity, the TKO Live Events Strategy Team. This move is designed to strengthen TKO’s presence in the live events market.

However, the company is currently facing a setback in a proposed $335 million settlement in a class action lawsuit brought by former UFC athletes. The court denied preliminary approval, delaying the resolution and forcing TKO to explore other options, including a possible appeal and separate settlement talks.

Despite these challenges, analyst firms maintain their positive rating for TKO Group and indicate the possibility of a new settlement before the trial date. These are the latest developments in TKO Group’s business.

InvestingPro Insights

While TKO Group Holdings (NYSE:TKO) receives a positive rating from Pivotal Research, the InvestingPro platform offers additional insights consistent with the company’s promising trajectory. According to real-time data, TKO posted an impressive 107.77% revenue growth over the trailing twelve months through Q2 2024, reflecting the company’s strong post-merger performance. The stock is also trading near its 52-week high, at 95.27% of that peak, indicating a market consensus on its upside momentum. Moreover, the significant price increase of 42.37% over the past six months underscores investors’ confidence in the company’s future.

Two particularly relevant InvestingPro picks for TKO’s situation are the expectation of net income growth this year and the forecast of revenue growth in the current year. These picks are consistent with Pivotal Research’s forecast of stronger revenue growth opportunities for TKO following the UFC-WWE merger. Additionally, the moderate debt levels and potential for profitability this year, as highlighted by InvestingPro, complement the research firm’s emphasis on TKO’s strategic cost-cutting initiatives and capital expenditures.

For investors who want to dive deeper into TKO’s financials and forecasts, the InvestingPro platform lists numerous additional tips and offers comprehensive analysis that can help in investment decisions. To explore these insights further, one can visit.

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