If you saw a business with such narrow margins that it recorded a loss every other year, was only active for nine months out of twelve, had $2 billion in debt, AND relied on fossil fuels; would you invest?
Well, damn, with those statistics, not even Leclerc’s smile can win me over.
… what if it was only getting started?
Formula One is a publicly-traded industry, listed on the Nasdaq under the ticker symbol, ‘FWONK’, and has returned 150% to investors in the five years since it went public. Formula 1 drivers sure do see their fair share of thrilling ups and downs, but here’s how investing in motorsport can be equally exciting.
I, for one, am totally OBSESSED with Formula One racing. The thrill. The excitement. The Daniel Ricciardo. The everything. This article is most definitely going to be set in a completely different tone from my usual column, because have you, like I have, ever dreamt of owning a slice of your favorite sports team?
It all started during the Texas Grand Prix in 2021. I’m sitting in my dorm — mad at myself for not being able to find anyone as crazy as me who I could drag out to Texas for the weekend. I move halfway around the world to a country where the Grand Prix happens, to not watch in-person?! Anyways, I decide to join the thrill in the one way I can — the stock market. Here’s a peek at my notes.
The Formula One Group is one of the best known in the motorsports business. It holds commercial rights for the F1 World Championship — a racing league that competes in different cities around the world over a nine-month season in which teams compete for the constructors’ championship and drivers compete for the drivers’ championship.The company was founded in 1950 and has its roots in Englewood, Colorado. Today, the Formula One Group is a subsidiary of Liberty Media Corporation.
Historically, individual investors have been shut out from investing in all but a few athletic leagues and teams, with most staying private. However, since being acquired by Liberty Media in 2017, racing league Formula One Group (NASDAQ: FWONA) has been a publicly listed company. This means that their ownership is organized via shares of stock which are freely traded on a stock exchange. More specifically, the league is available as a tracking stock, meaning that while the business is still a subsidiary of Liberty Media, anyone can buy shares in Formula One and realize potential gains or losses without having to invest in the entire Liberty entity.
The business model
The league has ten teams and twenty drivers owned by businesses like Mercedes, Ferrari, and Red Bull (yes, the energy drink company has a team). The league earns a profit through video broadcast rights, sponsorships, and ticket sales. At the end of each year, each competing team receives a pay-out from the league based upon a contract known as the Concorde Agreement. Although its details are unknown, except for the pay-put’s dependence on where teams finish in the standings, it makes Formula One’s business model fairly simple, with the league keeping a predetermined amount of the sales it generates each season.
2020 must have been brutal on the model, right?
In March of 2020, Formula 1 came within two hours of starting its season when we saw it temporarily shut down its operations after a member of McLaren tested positive in the Australian Grand Prix.
“Fortunately, Formula 1 is the sort of industry that thrives on logistics, thrives on organizational challenges and thrives on complex problems, and so once we started to put our heads together, we began to see a way we would be able to operate,” Ross Brawn, managing director of motorsports at Formula 1, said in an interview.
On July 5, racing resumed with the Austrian Grand Prix — with no fans at the Red Bull Ring — and it set the pace for the rest of the year that saw races with no audiences. This caused sales in the first two quarters of 2020 to fall more than 80% from the year prior. However, things picked up in the second half of 2020 once the season got back up and running, with sales only falling 5.7% and 7.3% in Quarter 3 and Quarter 4, respectively.
Things are looking better in 2021 with a full season of 23 races scheduled and fans trickling into stadiums based on government mandates in the different cities.
In fact, F1 is quite literally accelerating in 2021. The easiest way for Formula One to grow its business is to grow the number of fans of the sport. And when it comes to getting a following, nothing can top Netflix.
Thanks to our best lock-down buddy, Netflix, Formula One has become more popular since the advent of the globally trending F1 documentary series ‘Drive To Survive’, which is currently filming its fourth season, having trended at number one across the globe this year once more. The incredibly well-produced show goes behind the scenes with the ten teams during the year’s season and introduces a new layer of suspense and drama that has attracted new fans to the sport and renewed the excitement of the sport for older fans.
Formula One’s recent rise in popularity across the globe has led F1 to strike a ten-year deal allowing for a second U.S. race to be hosted beginning in 2022 in Miami – essentially equaling more employees, more F1 ground, and more people whose lives will be impacted by this sporting league. This potential for growth is a positive sign for many investors. There has also been talk about another race in China due to a growing fanbase. I just have to comment and say, side note: I’m sorry @ the racers, we aren’t considering the strains of being in a new continent every week.
The league has recently changed its competitive rules as well by putting caps on the amount of money each team can spend per year on their cars, with the goal of making the sport more competitive. Those who watched the show can tell you off the back of their hand what a difference this would make. A phenomenon we see even in the Premier League, the argument is that historically the teams with the most money — like Mercedes or Red Bull —- win each year, dampening the competitive aspect of the races for fans. And who wouldn’t just love to see George Russell get that podium. The fact that the league is challenging its conventions and making bold decisions faster tells us that the current board of directors could push the league forward along the track.
Another new piece of information is that Electronic Arts (NASDAQ: EA) recently bought Codemasters — the gaming company which owns the rights to F1 racing games. Being the biggest sports video game company in the world, hopefully they can also help supercharge the F1 franchise.
So while 2020 did snap F1 in two, like in Grosjean’s style, they pulled themselves out of the fire with a whole new game plan.
Let’s talk valuation
In terms of growth, the end-of-year financial report for 2019 saw audience figures increase across digital and TV platforms for the third consecutive year. Cumulative TV viewers grew 9% alone and came in at 1.9 billion. For 2020 this was an average of 87.4 million viewers per race on TV platforms alone.
In revenue, growth has been substantial at 10% between 2018 and 2019, coming in at just over $2 billion for the year. Between 2019 and 2020 the pandemic cut the season short, leaving only 17 races and bringing in $1.14 billion revenue for the year. COVID-19 severely ate into the revenue streams that the group gained from ticket sales, advertisements, and sponsorship fees. Formula One has reported revenue of US $501 million for the second quarter of 2021, an increase of 1,988 per cent in comparison to 2020. Top-line growth such as this should lead to stronger cash flows and a stronger share value.
Formula One Group has a lot of potential to grow its business, but the stock does trade at a steep valuation. With a market cap of $9.34 billion, the company has a price-to-sales ratio of 4.7 and a price-to-operating cash flow ratio of 32 based on its 2019 financials. 2020 was a lot worse, as you might expect, as revenue was almost cut in half and earnings and cash flow went negative. The business also has around $2 billion in net debt (total debt minus cash) that it will have to pay back eventually.
If Formula One can keep up its viewership growth trajectory with the Netflix series and Miami race, however, there’s reason to think the company can grow its earnings substantially over the next few years and beyond. If that is the case, the Formula One Group looks like a stock trading at a reasonable price for any investor with a long-term time horizon.
Ways to invest in Formula One
Once you have your answer to whether you’d like to invest in Formula 1, you’d think the hard bit of decision making is over. Well, at least I did. Turns out there are three different stocks that an investor can choose to buy; here’s the groundwork compiled for you.
Formula One Group Series A. (FWONA)
FWONA shareholders are entitled to one vote per share. Voting rights allow a shareholder to vote in elections for the board of directors and on proposed operational changes. While for the majority of retail investors this is probably not going to be an influencing factor, if you’re thinking of getting a thick slice of the pie, it should.
Formula One Group Series B. (OTC: FWONB)
This stock is unlisted and is only available over-the-counter, so it’s no surprise that 97% of these owned shares are held by insiders of the company. OTC stock is often riskier and more complicated to buy than those listed on a major exchange, but a share of this stock entitles the holder to ten votes.
Formula One Group Series C. (NASDAQ: FWONK)
This is the more popular stock for retail investors to choose out of the three. While this stock has no voting rights for shareholders, it makes it a fuss-free way for those who are interested in Formula One but not overly pushed to have a say in the business. This is merely a way to invest in, sit back, and relax whilst you watch tracks burn up around the world.