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On Wednesday, Morgan Stanley (NYSE:) initiated coverage on TKO Group Holdings (NYSE: TKO), assigning an Equalweight rating with a price target of $95.00 per share. The financial institution recognized TKO Group’s potential for providing investors with consistent and highly contracted revenue growth, strong free cash flow (FCF) conversion, and direct exposure to the expanding live sports sector on a global scale.
The rating reflects the firm’s view that the current valuation of TKO Group adequately captures the expected growth, considering the new deals with NBC-SmackDown and Netflix-WWE, as well as projections for forthcoming renewals. While acknowledging the strategic alignment between the UFC and ESPN, Morgan Stanley expressed a cautious stance on the sports rights market, adopting a below-consensus 1.6x average annual value (AAV) perspective.
The price target of $95 is based on multiples of 22x price/forward free cash flow and 14.6x enterprise value/forward EBITDA, calculated on 2026 estimates. These estimates take into account renewals for UFC and PLE, discounted back to year-end 2024. The analysis anticipates a somewhat subdued revenue growth for TKO Group in 2024, attributed to two timing issues: a reduction in the number of UFC pay-per-view events compared to the previous year and uncertainty surrounding 4Q24 US Raw revenues from WWE.
InvestingPro Insights
Morgan Stanley’s initiation of coverage on TKO Group Holdings comes at a time when the company is demonstrating robust financial health and market performance. According to InvestingPro data, TKO Group boasts a significant market capitalization of $14.98 billion, reflecting investor confidence in its business model. The company’s revenue growth is particularly impressive, with a quarterly increase of 31.8% as of the last twelve months ending Q3 2023, indicating a strong upward trajectory in sales.
InvestingPro Tips suggest that while analysts expect TKO Group to be profitable this year, with net income anticipated to drop and two analysts having revised their earnings downwards for the upcoming period, the company’s solid gross profit margin of 71.16% over the same period showcases its efficiency in maintaining profitability. Moreover, TKO Group’s liquid assets surpassing short-term obligations is a testament to its financial resilience, providing a cushion against market uncertainties.
While TKO Group is trading at a high EBITDA valuation multiple, which could raise concerns about overvaluation, the company’s strong return over the last month, with a 13.46% price total return, aligns with Morgan Stanley’s price target of $95.00 per share. For those looking to delve deeper into TKO Group’s financials and future prospects, InvestingPro offers additional insights and metrics. Interested readers can unlock more InvestingPro Tips for TKO Group by visiting https://www.investing.com/pro/TKO and using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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