Endeavor Group Holdings

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Endeavor Group Holdings is a global sports and entertainment company, operating across content, live events, and representation.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Endeavor’s moat rating is a 2 out of 5, indicating a narrow but not deeply defensible competitive advantage. The business benefits from network effects within its agencies, which tend to be winner-takes-all markets where the size and scale of the business creates advantages. However, these advantages are vulnerable.

While Endeavor has some strong assets, these do not fully translate into long-term, sustainable economic moats.

  • Agency network: Endeavor’s representation business is a high-barrier-to-entry business that depends heavily on the reputations of the talent they represent, and the connections that agents establish. Larger agencies have more connections to various opportunities, which helps them attract better talent, and this creates a virtuous cycle. Talent and connections alone do not create a moat though.
  • Content creation: The company benefits from the ever-increasing demand for content across mediums. However, content is a hit-driven business, and it is hard for any single company to consistently deliver successful content. This segment operates in a very competitive environment, so the moat is weak here.
  • Live events: EDR has established itself in several high-profile live events. It is often difficult for others to duplicate because they require established infrastructure, relationships with venues, and strong brands. In the short-term, they possess wide moats. However, competition in the live event space is intense.

Despite all the positive, these are the risks that can erode its moat:

  • Management talent risk: Their business model is dependent upon certain individuals. If they do not retain their staff/talent, their connections and consequently the value may go down.
    • Technological disruption risk: The changing media landscape, where content production and distribution is being revolutionized, remains a threat to the company’s value. For example, live sports can be streamed online easily without a middleman, hurting the company.
    • Reliance on key personnel: Endeavor is heavily reliant on a few high-profile individuals for their success.
    • Competition: The markets in which they operate face high competition. As competitors improve, the company will have increasing difficulty with pricing and gaining clients.

Given the volatility and the intense competitive pressure within the various industries in which the company operates, its moat is quite narrow and not well entrenched.

Business Overview

Endeavor Group Holdings operates through three core segments:

  1. Owned Sports Properties: This segment comprises the company’s owned sports leagues and events, including the UFC, Professional Bull Riders (PBR), and a series of smaller events. The company owns or partially owns the leagues and generates revenue by selling tickets to live events or licensing broadcast and other rights.
  2. Events, Experiences & Rights: This segment focuses on live event production and management, as well as its media and rights businesses. They provide production capabilities to various large-scale events. As rights owner, the company derives revenue from broadcasting rights. They have created and managed several key events over the years.
  3. Representation: The segment comprises talent representation through various agencies like WME and IMG. They serve clients in various mediums, including movies, television, sports, fashion and marketing. They generate revenue from commissions from client earnings, and contracts for marketing, advertising, and consulting services for their clients.

The company’s revenue streams are diversified geographically, but the business is heavily dependent on several strong business sectors. For example, the live events business is very profitable, but is also vulnerable to unforeseen circumstances.

  • Market Trends: The market is being influenced by factors such as a greater demand for digital content, a greater importance of live experiences, and consolidation among key market players. The changing market is affecting various businesses differently. While the demand for content continues to increase, some old mediums are losing popularity and are being disrupted. For example, television ad revenue has slowed down, while streaming revenues have gone up.
  • Competitive Landscape: The company faces intense competition from other talent representation agencies, event organizers, and streaming companies. The company competes with both public and private firms, which makes for an extremely competitive environment.
  • What Makes Endeavor Unique: Their integrated model, which spans talent representation, content production, and live event management, makes them an entity with more diversification than competitors. Their size and scale also allows them to make investments in newer ventures.

Financials

  • Revenue: Revenue growth has been impressive, but also volatile. The company is dependent on a number of factors which include the popularity of their client base and the economic conditions that impact both live events, and spending for content creation. The company’s Q1 2023 earnings showed a revenue of 1.57 billion, which was a huge increase from 1.23 billion in 2022. This was due to a huge growth in their Owned Sports Properties business by over 30%.
  • Profitability: EDR’s profitability is good in general, however the margins can fluctuate based on operating conditions and their high reliance on debt. The company had a net income of $118 million in Q1 2023, which was better than the loss of $304.2 million in the same quarter last year, but it’s worth noting they sold Endeavor Content in the last quarter of 2021 for 873.7 million, which significantly lowered their expenses and gave them a bump. Their latest TTM gross profit is 4 billion.
  • Expenses and Cost: The company has to spend a lot of money, especially with a large number of employees. But as long as revenues continue to grow, operating margin should improve. One-time expenses for acquisitions can distort short-term profitability.
  • Debt: EDR is still highly levered with close to 5.7 billion of debt at the end of Q1 2023.
  • Cash Flow: Free cash flow is extremely volatile, as the company has high capital requirements and also has to reinvest much of its profits into acquiring companies and building content. In Q1 2023, they reported negative free cash flow of 32.4 million.
    • The company has historically used debt rather than equity to finance its operations.
  • Liquidity: The company’s ability to pay short-term obligations is below average. However, they have enough access to capital that they should be able to meet these obligations in the short to medium term.
  • Capital Allocation: The management has continued to invest in acquisitions rather than paying down debt. The return on these acquisitions is not immediately evident.

The market seems very positive about the company’s future. The high market capitalization combined with very low FCF implies that the company needs to continue to deliver growth and returns.

The latest earnings call showed that the management is optimistic about growth. They have laid out targets for each segment. They are particularly bullish about their long term contract with the UFC and the possibility of expanding into newer geographies. They also mentioned that they would focus more on generating free cash flow as well.

Understandability

The business model has many moving parts which makes it difficult to understand completely. The fact that they operate in various segments, and use diverse metrics makes it harder to understand the company. The company also has a number of subsidiaries and joint ventures that can be difficult to understand. For that reason, the business is not easy to grasp by a typical investor. The rating for understandability is 3 out of 5.

Balance Sheet Health

The company’s balance sheet is not particularly healthy, with a high debt burden. That makes it extremely vulnerable to a downturn in the economy. The balance sheet health rating is 3 out of 5.

The company has taken on debt to fund their rapid growth, and now needs to focus on deleveraging. Their free cash flows are also volatile, and do not provide that much comfort either. The company does have enough access to capital in the markets currently. It’s worth watching how the company will bring its debt down.

Controversies/Problems

  • COVID impact on live events: The pandemic significantly affected EDR’s events segment, forcing cancellations and postponements. As a result, the company faced huge declines in revenue in 2020. However, EDR has now fully recovered and they are reporting record revenues from their live events business.
  • Acquisition strategy: They have spent a large amount on acquisitions over the years. The company’s profitability is affected by goodwill and related expenses from these acquisitions. It is unclear if the revenue and profitability that they will bring justify the price. The market is quite uncertain if these purchases of various assets will help build a moat or erode value for shareholders. The company did sell some noncore segments in the past, however they are not consistent at this and prefer to hold on to businesses and leverage them for their potential.

The company is well-positioned in the growing sports and entertainment market. The company must perform well in its core business segments and effectively manage its expenses to ensure consistent growth and profitability.