On Wednesday, Pivotal Research adjusted its projections for Liberty Formula One (NASDAQ:FWONK), elevating the stock price target to $100 from the previous $92, while retaining a Buy rating on the stock.
The firm cited several factors for the optimistic stance, including strong fourth-quarter results, a 22% year-over-year EBITDA growth expected in 2023, which is anticipated to further accelerate in 2024, and an upward revision of post-2024 broadcast rights fee expectations.
The research firm expects this year's EBITDA and free cash flow to benefit significantly from the addition of two extra races and a predicted substantial improvement in returns from the self-promoted Las Vegas Grand Prix.
The structure of Liberty's agreement with racing teams, which allows for a larger share of incremental revenue growth, and the continued strong momentum of the sport were also highlighted as contributing factors to the price target increase.
The new price target is primarily based on higher assumed long-term sports rights fees and, to a lesser extent, lower forecasted team payouts. The firm views the entry of Netflix (NASDAQ:NFLX) into the bidding for global sports rights, as demonstrated by their acquisition of WWE rights, as a major positive development for Formula One.
The analyst suggested that Netflix, with its extensive global reach, would be an ideal broadcast partner for Liberty Formula One.
Moreover, the firm anticipates aggressive competition for broadcast rights in the medium to long term, especially with the ESPN USA contract for the 2025 season nearing its end, potentially leading to a bidding war for Formula One rights.
The firm's valuation of Liberty Formula One is based on a discounted cash flow (DCF) methodology, applying a 20 times multiple to the expected 2025 EBITDA and an 8% discount rate, along with a 10% tracking stock discount.
The firm also noted that Liberty Formula One is currently trading at 19 times its expected 2024 EBITDA and 15 times the 2025 EBITDA, with the company poised for continued material acceleration in EBITDA and free cash flow.
The report highlighted the flourishing state of Formula One, evidenced by the expansion to 24 races in 2024, strong race attendance, extended broadcast and track deals, new engine suppliers, the success of the Las Vegas Grand Prix, and growing social media and television viewership.
Pivotal Research concluded that the current valuation does not fully reflect the company's performance and suggested that a potential broadcast rights bidding war could position Liberty Formula One as an acquisition target for global players, with a valuation possibly exceeding $30 billion, or approximately 25 times the expected 2025 EBITDA.
The firm reiterated its Buy rating and set a new Street High target price of $100.
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