On Thursday, Goldman Sachs initiated coverage on TKO Group Holdings (NYSE: TKO), bestowing a Buy rating on the company's stock with a price target of $102. Based on the company's current trajectory and market position, the firm's analysts forecast a 26% total return potential for the stock.
The initiation follows the recent strategic moves by TKO Group, including the combination of UFC and WWE under its portfolio, which are expected to fuel the company's growth. Goldman Sachs predicts that TKO Group will experience high-single-digit annualized growth in revenue and low-double-digit annualized growth in Adjusted EBITDA.
This growth is anticipated to be driven by several factors, including the strong secular tailwinds in the sports media and live entertainment industries, the company's ability to capitalize on revenue and expense synergy opportunities, and the inherent operating leverage due to TKO's relatively fixed expense structure.
The analysts at Goldman Sachs have assessed TKO Group's valuation and believe that the company's shares are trading at a discount compared to its peers when adjusted for growth. They argue that TKO Group should be valued approximately in line with its peers, given its exposure to strong secular trends, clear visibility into future revenue and EBITDA growth, robust cash conversion capabilities, and the potential to rapidly reduce debt and return capital to shareholders.
The $102 price target assigned by Goldman Sachs is derived from an equally weighted average of three different valuation methods: a multiple of 14 times the estimated 2025 Adjusted EBITDA, 20 times the estimated 2025 Free Cash Flow (FCF), and a Discounted Cash Flow (DCF) analysis using a 9.2% Weighted Average Cost of Capital (WACC) and a 3.0% Terminal Growth Rate (TGR).
The firm's positive outlook on TKO Group's stock reflects confidence in the company's strategic positioning and future financial performance.
InvestingPro Insights
Following the optimistic initiation by Goldman Sachs, data from InvestingPro provides further insights into TKO Group Holdings' financial health and market performance. The company's market capitalization stands at a sturdy $13.75 billion, indicating a significant presence in the industry. Despite a negative P/E ratio of -187.01, which reflects its recent lack of profitability, analysts forecast a turnaround with net income expected to grow this year, as per InvestingPro Tips.
InvestingPro Data also shows an impressive revenue growth of 46.91% over the last twelve months as of Q1 2023, with an even more remarkable quarterly revenue growth rate of 125.92% for Q1 2023. This aligns with Goldman Sachs' prediction of high-single-digit annualized growth in revenue for TKO Group. Additionally, the company operates with a moderate level of debt, which supports the analysts' view that TKO has the potential to rapidly reduce debt and return capital to shareholders.
While TKO Group does not pay a dividend to shareholders, the focus seems to be on reinvesting to drive growth and profitability. With analysts predicting profitability this year and a fair value estimate of $87.71 according to InvestingPro, there appears to be an opportunity for investors. For those interested in deeper analysis, there are numerous additional InvestingPro Tips available at https://www.investing.com/pro/TKO, providing a comprehensive look at TKO Group's financial and market performance. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription for more detailed insights.
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