TKO Group Holdings Inc. (TKO, Financial) is a sports and entertainment powerhouse under the Endeavor brand, which also owns a global talent management company in IMG. Having gone public earlier this year, TKO combines two of the biggest sports brands in World Wrestling Entertainment (WWE) and Ultimate Fighting Championship (UFC).

Since its debut last September, the stock has surged impressively and is up over 32% year to date. However, the stock has been a laggard lately, trading roughly 5.50% higher than its initial public offering price of $102. Additionally, shares are 4.70% below the 52-week high price of $113.30.

Despite the recent sluggishness, I believe it is an interesting time to consider loading up on the stock. Given the powerful flywheel effect of the WWE-UFC combo and anticipated gains from multiple deal renewals, TKO could potentially go on a sustained rally. Its fundamentals remain excellent, and the current pricing dynamics point to a hefty upside.

With that in mind, let's delve deeper into TKO's current positioning and explore its prospects.

The flywheel effect of UFC-WWE synergy

The dynamic duo of UFC and WWE sets TKO apart as a powerhouse in the entertainment space. Moreover, combining two of the most iconic sports brands known for their massive viewership and steady growth over the years positions the company as a juggernaut in its niche. Additionally, its unique combination creates a flywheel effect, allowing both brands to benefit from compounding benefits. These brands can effectively leverage their market presence, revenue streams and audience engagement to become even bigger entities. Consequently, both companies can effectively create massive synergies in media rights and event promotions and build on their global outreach.

2023 was a standout year for both brands, with UFC raking in $1.29 billion through pay-per-view buys, streaming contracts, merchandise sales, event sponsorships, international broadcast deals and more. On the flip side, WWE outperformed the UFC slightly, posting $1.33 billion in sales from similar revenue streams.

Moreover, both companies are coming off two major landmark events. The UFC 300 dazzled with a record-breaking $16.50 million gate, marking a franchise high. On the other hand, WrestleMania XL in Philadelphia shattered records for the WWE as the highest-grossing event ever. It saw a 78% surge in gate receipts year over year, a 41% jump in viewership and a 20% increase in merchandise sales.

Unsurprisingly, the cash registers are ringing for the company. Its free cash flow margin is healthy at 19%, comfortably beating the industry median of 2.20%. Moreover, GuruFocus suggests that its FCF margin ranks above 88% of the companies operating in the media-diversified space.

Given that Wall Street consensus estimates project a swing to earnings of $2.06 per share this year, up from last year's $2.74 loss, it is clear the company's free cash flows will continue swelling for the foreseeable future.

Understanding recent insider sales

Insider sales can help gauge confidence in a company's direction, yet recent transactions could spark worries over TKO's future momentum. The chart below highlights four significant insider sales from top WWE executives of late, yet there is little cause for concern.

The biggest insider sale comes from WWE founder and former CEO Vince McMahon, who liquidated a sizeable portion of his holdings in the company. From November 2023 through April of this year, he has sold more than 17.2 million shares of the company, pocketing more than $1.36 billion. Based on the chart above, he still retain 32% of his initial holdings, which amounts to roughly 8 million shares.

According to reports, McMahon had been selling off shares in TKO following his departure from the board amidst misconduct allegations. Additionally, reports suggest the sale is part of his financial strategy to manage debt, with his shares serving as collateral. Therefore, the sales have little to do with the company's direction.

Similarly, WWE CEO Nick Khan sold more than 46,000 shares of TKO in July, generating almost $5 million from the sale. However, the sale was mostly to pay for taxes, something he did last year around the same time. The stock sale was partially to pay for Khan's taxes.

Deal renewals ahead: Anticipating gains and future prospects

A lot of TKO's bull case hinges on rights renewals coming up in the next year and beyond. According to Ed Vyvyan from Redburn Atlantic, the company is in an excellent position to leverage the growing popularity of combat entertainment sports. He pointed out that WWE's existing contract with Peacock is undervalued; with upcoming renewals for both WWE and UFC broadcasting rights, the landscape could shift dramatically. Additionally, the attractive negotiating environment has plenty to do with the hotly competitive entertainment space, with streaming giants now in the mix.

Speaking of streaming giants, Netflix (NFLX, Financial) struck a massive deal earlier this year with TKO, gaining exclusive global rights to stream WWE's flagship show, "Monday Night Raw," as part of a 10-year, $5 billion deal. Additionally, it has secured streaming rights for other flagship WWE shows, including SmackDown and NXT, as well as major live events like WrestleMania, SummerSlam and the Royal Rumble, across multiple regions.

The Netflix deal is a game-changer for WWE, offering unprecedented reach into the streaming pioneer's subscriber base of over 200 million. Moreover, it replaces the previous NBCUniversal and Peacock deal valued north of $2 billion, a major step up for the business.

Similarly, UFC's current broadcast rights with ESPN are set to expire next year, and the company is exploring new deals. Its current ESPN deal worth $1.50 billion, gives ESPN access to all UFC content, including lucrative pay-per-view events. However, given the company's robust top-line performances and sellouts over the past few years, industry analyst Eric Handler from Roth MKM anticipates a massive TV deal. Handler expects a substantial increase in value, potentially doubling the current terms.

UFC CEO Dana White also commented on the potential scope of the upcoming rights deal, noting, "Our rights deal is going to be a big deal coming up here.” He said, “Who knows? We could end up like the NBA and the NFL, where we end up on multiple channels instead of just one.”

Final word

TKO has run red hot over the past year, but all things considered, it offers healthy upside potential ahead of interest rate cuts.

The synergy between the two sporting juggernauts it houses will continue building on TKO's market presence while adding significantly to its top- and bottom-line results. Moreover, we could be looking at two marquee years for the business, with major broadcasting rights deals coming up. We have already seen a teaser of what that could hold following WWE's massive Netflix deal, which could take the brand's reach to a whole new level.

Hence, it could be an excellent time to load up on the stock, especially given its promising outlook and robust foundational strategies. Moreover, based on estimates from 15 different Wall-Street analysts, TKO offers an encouraging 11.40% upside potential.