← Motley Fool Hidden Gems Investing
Motley Fool Hidden Gems Investing
The Business of Vice: UFC, Sports Gambling, and Tobacco’s Comeback
00:24:52
Loading summary
Transcript24 lines
- [00:00]
Nick Seiple
Foreign.
- [00:06]
Emily Flippen
Motley Fool Money vice is hot again. We'll hit TKO's monster UFC deal, the state of sports betting, and a surprise twist in tobacco. I'm Emily Flippen and today I'm joined by analyst Nick Seiple to discuss sin stocks, in particular, these polarizing businesses that have made an increasingly large amount of money off of the worst of human nature. Today our goal is to answer the question, is today's environment really creating moats for these businesses or is it just pulling forward returns? We'll discuss what's changing in the industry, who is executing, and where the risks really are. But first, Nick, we have to talk about the news out earlier this week. Paramount, right after its merger with Skydance, has made a deal with TKO Group for exclusive rights to all US based UFC events starting next year. It's a seven year deal with a whopping $1.1 billion a year on average in rights fees. Now, I know we've seen this sprint over the course of the past few years towards live events, especially fights. It's not really up my alley, but Nick, I know TKO Group is one of your largest personal holdings, so I think I know where you stand on this. But I also have to imagine that a lot of our listeners have maybe never even heard of this business or thought about investing in things like live sports entertainment before. So what should investors know about this deal?
- [01:29]
Nick Seiple
Thanks, Emily. Yeah, great to be here with you. For folks who aren't familiar with the TKO Group, it is the parent company of the WWWE and the UFC, a content provider that in this world of streaming, where they want to keep folks on the platform all year long, keep them from churning. Both of these are sports that don't have an off season. They have an event, a marquee event every month and, you know, lower level events every week. And streamers are certainly willing to pay up for that. And we've seen that in the past week with this Paramount deal. As you mentioned, Paramount will be paying about $1.1 billion per year for the UFC's content. That's its 13 premier numbered events a year, as well as dozens of Fight Night events. All those will be exclusive to Paramount plus with a number of them also airing for free on the CBS network. This is a significant step up from the prior deal with ESPN on ESPN plus that was about $550 million annually. In addition to this big step up in rights fees, this is a big increase in reach for the ufc. It's moving from the double paywall they were dealing with on ESPN where you had to be both an ESPN plus subscriber and pay $80 give or take each month to buy the pay per viewed events to now this distribution is to all subscribers on Paramount plus, if you pay $8 a month with ads, you can get all the UFC content that you desire. That's a clear demonstration that you know media companies are willing to pay up for this content. By all accounts, Netflix, espn, many other large streamers were competing for this content. And this has been a busy week as well for the TKO Group. Last week, WWE's US Premium Live Events moved to ESPN on a $1.625 billion five year deal, almost a double from its previous deal with Peacock, which again a similar story here as you move from the from the Peacock over the top network to ESPN that will now be offered to $30 per month if you don't pay for cable, but if you do, you'll get it for free. Significantly more distribution. If you think about WrestleMania being on ESPN, being promoted on SportsCenter, that sort of thing really increases exposure for the UFC and WWE's content, which is great for the business and for fans.
- [03:44]
Emily Flippen
I can totally understand this. From TKO's perspective, right? From the right's perspective, it's just a step up. There's mostly fixed cost. So anytime you're able to raise the dollar value of these types of deals, it accrues very easily to a business like TKO Group. From. But from the perspective of the streamers or these platforms that are paying just insane amounts of money to get this programming, you think to yourself, is it worth it? Like, is the consumer demand really there? And I have to say, from my perspective, I. And granted, I know I realize I'm not the target audience here. I have Paramount plus for my reality TV needs, not my UFC needs. But that being said, it could be a combination of both consumer demand, but also just affordability of production. These types of live streaming events moving away towards subscription revenue as opposed to ppv. Those are the sorts of things that can drive people to stay and remain subscribed for. Presumably a much more affordable option, right?
- [04:39]
Nick Seiple
I mean if you think about too many of these streamers moving toward an ad supported model. One of those deals I didn't mention. But at the start of the year, WWE's RAW program moved to Netflix. Netflix obviously increasingly moving toward toward ad supported content. And in that world, sports really are king. A thing that can actually get you to show up on day and date when the content is out there. That. That is sports content. And you know, while the NFL still remains the king. The NFL has an off season. And the nice thing about ufc, WWE is they're on all year long and so you're not going to turn when, when the season comes to an end. Also you know, mentioned for, for Netflix, the production, right. TKO Group brings all their own production in house. So it's, it's plug and play when you sign on with this, uh, with this group, which I think is attractive to the streamers as well.
- [05:25]
Emily Flippen
And we didn't even mention the sponsorships that also come out of deals like this. We saw it with TKO Group this quarter as well as other businesses, but big partnerships, businesses ranging from, you know, Meta to Monster and others, Wingstop, even a bunch of great kind of rule breaker style businesses all paying up to get sponsorships and coordination with these live events. So despite the fact that it's an industry that I think has maybe isolated some investors who probably don't look at the world of UFC or WrestleMania as investable businesses, you can still expand that one step further and that expands to tko. That expands to, you know, Paramount and Skydance or Netflix, all of whom are trying to get stakes into what is increasingly expanding into a really high margin opportunity.
- [06:10]
Nick Seiple
Yeah, the advertising part of the business I think is really important. Right. This is a company that is largely driven by its media rights fees and most of those are, are behind them now after this big UFC and ESPN deal. However, still lots of meat on the bone when it comes to sponsorship and partnership revenue. As I mentioned earlier, big step up in exposure. Moving the UFC from the double paywall on ESPN plus to now largely broadcast on cbs. Big step up exposure in exposure as well, moving to ESPN from Peacock. And that additional viewership and exposure and legitimacy also brings in more advertisers. We've already seen that so far since the merger. At the time that, that, that the TKO business was formed a couple years ago, when the UFC merged with WWE, the WWE was doing $60 million a year in sponsorship and advertising revenue. They did $60 million in the most recent quarter alone. And you mentioned a number, a number of those, those partnerships. I think there's still lots of Runway to, to increase sponsorship revenue. Also with that additional exposure, you've had lots of local governments pay to bring these events to their markets. That started with the WWE with events in Saudi Arabia and other Middle Eastern markets. But you're starting to see more of those happen in the US and abroad as well. So while the big rights deals are behind the company, still lots of room ahead of them to Monetize this content through advertising and through site fees. All this of course super high margin revenue. You don't have to pay any more to produce your content while you know getting these higher rights fees, site fees and advertising. So this should lead to a significant increase in free cash flow for the TKO Group over the next couple years. In addition to, as I said, continuing to monetize via sponsorship and via site fees, this is becoming more of a capital return story. So last year in the fall announced a $2 billion buyback that is going to start up and start working through in this upcoming quarter. And so as that cash flow drops to the bottom line for the business going to increasingly be returned to shareholders.
- [08:18]
Emily Flippen
Looks like it Nick. Coming up next, we're discussing where all of this plays into sports betting and if the industry is as lucrative for investors as it is for the house, stick with us.
- [08:28]
C
Wish you could lock in rates without locking out liquidity. Meet lddr, a lifex treasury bond ladder ETF built to simplify your cash flow plan for the next 10 years. With LDDR, you can lock in today's interest rates for a decade. It's built to deliver predictable monthly cash flow that boosts interest income by including tax free return of principal. That means the potential for higher, more stable cash flow without worrying about rate cuts, reinvestment risk or market swings. Lddr Take the guesswork out of your cash flow plan. Learn more@lifxfunds.com the LIFX ETFs return principal over the life of an ETF and therefore expected to have little or no assets remaining to distribute at the time of liquidation. Individual bonds carry an obligation to fully return the principal to shareholders at maturity. However, ETFs have no such obligation. The net asset value of the ETFs will decline over time as income payments are made to shareholders. The tax discussion herein is general in nature. Investors should consult with their tax advisor about the effect that an investment in Lifex ETFs could have on their tax situation. Investors should consider the investment objectives, risks and charges and expenses of LDR carefully before investing. The prospectus contains this and other information about the investment company and can be obtained by visiting www.lifexfunds.com or by calling 1-888-331-5558. The prospectus should be read carefully before investing. Investing in the LifeX ETFs involve risk principal loss is possible. The LifeX Income ETFs are distributed by Foresight Financial Services LLC.
- [09:58]
Emily Flippen
Sportsbooks are rolling into NFL season with some Momentum Sports bet leader DraftKings just posted a record second quarter and FanDuel company Flutter raised its full year profit outlook on the back of jumping profits. Now sports betting is arguably the most popular new age sin industry and I have to say Nick, opinions across America seem pretty polarized here. I think lots of people view it as an expansion of freedom. So others are obviously concerned about the impact it's having on investors as well as individuals, personal lives and financial situations. But is this a type of industry that can accrue value to people who invest in it? Or do you think that concern around societal perceptions and regulatory headwinds are just too big of a hurdle to overcome?
- [10:43]
Nick Seiple
So I mean the short answer is yes, this absolutely can accrue real value. While sports betting is controversial, there is certainly product market fit. You can see that by, by the numbers out there in the industry. So if you look at online gaming revenue, the most recent data we have is in May as reported by the American Gaming Association. So for online sports betting and iGaming up 28.8% year over year. And that's, that's really translating to strong performance for these, these betting companies you mentioned. DraftKings just posted a record revenue quarter up 37% year over year. Also reported record net income and adjusted EBITDA Flutter, same thing, had a beat and raised quarter the most recent quarter. If you look at these two companies together, they control about 70% of the market here, which you know, puts them in a position where I think it's going to be quite difficult for them to be disrupted. They can engage in national advertising, have more economies of scale, can help, you know, already have the customers on their platforms to a large degree. And they're also getting better at getting folks to make bets that are better for the house than for themselves. DraftKings credited quote higher structural sportsbook hold and sportsbook friendly outcomes for their Q2 results. That really translates to we're getting folks to bet more parlays, they're not winning as much and therefore we're seeing increasing margin. So listen, I think this is a market where there's lots of demand out there as demonstrated by the increase in betting activity. The two companies that are the leaders in the industry are continuing to put up strong results and they're getting better at optimizing their businesses over time. So while there's going to be some bumps in the road, I don't think sports gaming is going away anytime soon. And I think the two companies that own the market today are likely to continue doing so for years to come.
- [12:25]
Emily Flippen
Yeah. And probably more likely to get more efficient and scaled at offering that as well. And there's numerous plays on the sports betting market. But to be honest, Nick, sports betting reminders me a little bit of an industry that I know particularly well, also a sin industry, so to speak, and that's cannabis investments. And I have to say, so much enthusiasm around the opportunity and the business behind cannabis and there's a lot of demand that has grown there, but it really hasn't accrued to investors. And one of the reasons why is because of the regulatory headwinds that have persisted much longer than many investors, myself included, thought they would. And we do have some news out this week that maybe again cannabis could be reclassified for the federal government. I'm not getting my hopes up. We hear this headline about twice a year now for the last five years. But there's been conversations around whether or not sports betting could go the direction of cannabis. Which is to say as evidence potentially stacks up here to show the negative effects that sports betting can have on people's financial lives, that states or the federal government start to be a bit more heavy handed with the regulations they hand down to these businesses that hampers their ability to grow cash flow and, and revenue. Is that something that is a concern for you?
- [13:36]
Nick Seiple
I mean potentially. Right. I say this all the time, that if your thesis for or against an investment is the government is going to do X and that's going to make the company do greater or it's going to blow up the thesis. Usually not a great thesis. There are some regulatory potential headwinds to the sports gaming business. Illinois increased their tax on online betting back in 2024, also layered in a per bet fee that is going to come into effect this football season and has led both DraftKings and FanDuel to in that state impose a per bet fee as well. You've seen the federal government introduce the federal Safe Bet act reintroduced, which hasn't passed yet, but it continues to be to be talked about. That could limit advertising, limit prop bets on college sports and you know, put some constraints around the business. And several states have already done that as well. That said, a lot of these are putting guardrails around the business, not shutting down the business. And I think, you know, states are getting lots of tax revenue from this and once states have money coming in, it's very difficult to convince them to turn things back off. The bigger concern. And because also I would say as well, this increasingly entrenches the established players, DraftKings and FanDuel can navigate these regulatory hurdles a little bit more comfortably than perhaps a new entrant could. And so I think, you know, the increased taxes probably entrench the existing businesses. One also potential headwind for growth is there's still some really big markets out there that have not yet legalized sports betting. California and Texas are two of those. And to the extent some of that negative sentiment puts, puts a barrier in front of additional states legalizing sports betting, maybe that limits the growth opportunity. But I'm not worried about the market itself getting pulled back. More guardrails putting around the industry, which I think is going establish the existing players.
- [15:31]
Emily Flippen
Yeah, for me, the difference between the, the kind of cannabis industry and sports betting is exactly like you just mentioned. The cat is already out of the bag to some extent when it comes to sports betting. Really hard for even individual states to put it back in the bag, so to speak. I will say though, when I think about the opportunity there, there's already, we already see scaling free cash flow with a lot of these sports betting companies and the months, quarters and years that go by without further regulatory changes, the more entrenched they get. To your point, the same is to a lesser extent to cannabis companies. But a lot of cannabis companies are, you know, they need rescheduling to happen to release a lot of the tax liabilities that they have just that accrue year after year. So there's a lot more, I think, clear tailwinds for the, and has been for years for the sports betting industry in comparison to cannabis. Not that they're a one for one trade off, but you see the difference there in terms of how that value is accruing already to shareholders of sports betting companies.
- [16:26]
Nick Seiple
That's right. I think the, the gold rush, you know, obviously this was legalized back in 2018. I think the gold rush obviously carried through for the first four or five years. And now as we're sitting here seven years on from legalization, we're approaching maturity. I think we can point to who the leaders are going to be. There can be some puts and takes around regulation, but I don't think this industry is going away. So the question is really not if these companies are going to be able to deliver free cash flow, but how much the regulatory environment allows them to capture. And that's really the question you have to answer to decide what the potential upside is for these businesses today.
- [17:02]
Emily Flippen
And it sounds like the juice may be worth the squeeze here. Up next, we're discussing tobacco companies, many of which are hitting multi year highs this year. We'll see you after the break.
- [17:11]
Nick Seiple
As a professional web creator, you're skilled at juggling it all. You deserve a platform that elevates your work. Wix Studio is built for designers, developers and marketers who demand more with high end design capabilities, streamlined workflows and robust business tools. Build with AI powered site mapping seamless figma to WIX Studio imports no code animations and built in responsiveness. Manage from one workspace, collaborate with teams, streamline workflows and deliver projects without the chaos, scale without the headaches. Reuse designs across projects, let infrastructure run itself and handle more clients without burning out. From freelancer to agency, Wix Studio grows with your ambitions. Build, manage and scale with hyper efficiency on Wix Studio.
- [17:59]
Emily Flippen
It turns out not all sins are headwinds. Just last month the FDA authorized Juul devices alongside tobacco and menthol pods after years of regulatory limbo. Clearly this is a tailwind. It has kept enthusiasm high for classic tobacco companies. Businesses like Altria Group are now up to 52 week highs. But Nick, we have to talk about tobacco. The most classic sin industry. Is the enthusiasm for the industry and tobacco stocks really only around the potential regulatory changes here or is there something else that's going on that's deeper?
- [18:30]
Nick Seiple
I'd say it's both. I mean if you look at the nicotine industry really been on a tear the last few years has outperformed the S and P and the NASDAQ over the past one, three and five years. If you look at this year alone, British American Tobacco, Philip Morris and altrii, which the big three, the nicotine industry up 66%, 43% and 30% respectively. You mentioned Juul and reduced risk products really have been a big part of the story this year. And really over the past several years in the US nicotine pouches have been the big attention grabber. If you listen to British American tobacco, the global nicotine Pouch market grew 36% globally in the first half of 2025, with the US market driving 70% of the overall market growth in the US alone. Industry is up more than 40% this year. So really rapid growth for nicotine pouches and that's come along with regulatory support. Back in January, in the closing days of the Biden administration, the FDA authorized Philip Mo Zen nicotine pouch product which is the market leader with more than 60% market share. They noted that nicotine pouches, according to the FDA pose lower risk of cancer and other serious health conditions than existing tobacco products provide more Potential benefit to existing tobacco users and risks they create to the public, including youth. So essentially there's this really fast growth industry in nicotine that if you read the tea leaves of what regulators are doing is going to be pushed or at least not opposed in the years to come. You're seeing that also in vaping. So you called out Juul being authorized by the FDA a few weeks ago. That's obviously a huge reversal from the ban back in 2022. If you look back even further than that, the flavor ban put in place in 2020 really has been a regulatory failure so far. While Juul and the big tobacco businesses have pulled out and are not selling flavored vaping products in accordance with the law, illicit products, many of which come from China, have come in to take their place selling, you know, strawberry bubble gum flavored vape products. And today, 70% or more of the vaping market in the US has been captured by illegal flavored vape products. But we've seen over the past year or so, both at the state level and the federal level, enforcement start to ramp up. So 18 states have already enacted vape directory and enforcement legislation. That's about half of the US vaping industry which is helping to crack down on some of these products. And in July, the federal government jumped in as well. The Appropriations committee directed the FDA to spend $200 million in fiscal 2026 specifically on enforcement against illegal vape products. If you think those products are going to come off the market after this increase in enforcement, that should lead to a return to growth for the legal vape market, which has really had some headwinds over the past several years facing these illicit products. While the legal vaping market is down mid teens year to date in the five states where active enforcement is already in place under those directory and registration laws that I mentioned earlier, sales of British American tobaccos VUSE products, this is a legal vaping product, increased between 5 and 13% in the first half of 2025. Should expect to see further growth as that enforcement ramps up. So all this to say, the regulatory environment for for reduced risk nicotine products has moved from prohibition as we saw a few years ago with Juul and the flavored vape industry towards risk reduction. And that's changed market perceptions for the nicotine business and the durability of the cash flows those companies can deliver. You see that in valuations. So just for one example, British American Tobacco back at the start of 2024 at a free cash flow yield above 15%. As we sit here today down to about 9%. You've seen a similar shift over from Altria as well. So for my part, I think nicotine sales aren't likely to shrink over the next decade. I think as reduced risk products start to ramp up and continue to take share, I think we can at least hold water. And I wouldn't be surprised if we see nicotine consumption move higher a decade or more from now than it is today. We've already, if you believe the commentary for many of the tobacco companies at maturity, these reduced risk products like vapes and nicotine pouches should carry structurally higher margins than legacy tobacco products. And the way the regulatory environment is developing, probably not going to see a lot of new entrants into this industry. The companies that control the tobacco, the nicotine profit pool today, likely to be the companies that continue to control the profit pool in the years to come. If that's right, I think these companies still have quite a bit of room to run. If you look Back to the 2017, 2018 period, these companies were carrying dividend yields sub 3%. British American Tobacco still above 6%. Altria still close to 6%, as well as attitudes around the durability of nicotine sales shift. And as these reduced risk products continue to gain share, I think there's still some upside for the nicotine space.
- [23:15]
Emily Flippen
Nicely said. And if I had, you know, one way to kind of sum up the conversation, it sounds like for every investor, their engagement with like sin stocks or sin industries, I think is going to be dictated by where their own personal lines are drawn. Some people would never touch a space, won't even invest in an index fund if it potentially invests in these types of businesses. Whereas others see value where, you know, some people may not be willing to fish. And I think ultimately where that line is drawn is up to each individual investor and listener. But for people who are willing to venture across paths that others may not go down, that sounds like there's relative value to explore, especially in these industries that have been written off by so many people.
- [23:52]
Nick Seiple
That's right. I mean, when I think about sin stocks, I don't know if David Gardner would agree with me, but if you think of sign six of a rule breaker is right grossly overvalued according to overall market commentary. And as I read, that is people just throw something out without even thinking about it because it looks too expensive. I think sin stocks rhyme with that in a lot of ways. That they're a segment of the market that people, because it's controversial or for whatever reason, their own personal experience with it. They throw it out and don't even ever look at these businesses. And I think if you look at some of these, especially nicotine, over the past several years, the structure of the market is changing in a way that is supportive to these businesses. And I think as more and more people look at that, that's more and more people who are potential buyers of the stock.
- [24:34]
Emily Flippen
A very pragmatic approach. Nick, thank you so much for joining.
- [24:38]
Nick Seiple
Thanks, Emily. Anytime.
- [24:40]
Emily Flippen
As always, people on the program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations for Oregon. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes Notes For Nick Scipal and the entire Motley fool money team, I'm Emily Flippin. We'll see you tomorrow.