Citi stays bullish on TKO stock, points to step-up in domestic sports media rights

On Thursday, Citi reaffirmed its Buy rating on shares of TKO Group Holdings (NYSE: TKO), with a steady price target of $137. The endorsement follows recent developments in sports media rights agreements, particularly the United States Tennis Association's (USTA) extension of its US media rights for the US Open through 2026. The deal is set to increase the domestic rights fee for the event by approximately 2.2 times starting in 2026.

This substantial uptick in the value of the US Open media rights is compared to other recent sports rights agreements, which have also seen significant increases. For instance, the National Basketball Association (NBA) rights have escalated to around 2.6 times their previous value, the Big East conference to about 1.8 times, and the French Open tennis championship to approximately 5.4 times their earlier fees.

The positive momentum in media rights valuations is seen as a favorable sign for TKO Group Holdings, particularly as the company prepares to renew its domestic media rights for the Ultimate Fighting Championship (UFC) before the fourth quarter of 2025. Although the duration of the previous UFC deal was seven years, shorter than some other sports contracts, the trend in rising rights fees is viewed as a good omen.

Current consensus estimates from the sell side suggest an anticipated increase in UFC's domestic media rights fee by about 1.5 to 1.6 times in 2026. This projection is more conservative compared to the step-ups seen in other recent sports rights renewals.

Citi's reiteration of the Buy rating for TKO Group Holdings reflects confidence in the company's potential to secure a lucrative media rights renewal for the UFC, aligning with the broader trend of rising valuations in sports broadcasting rights.

In other recent news, TKO Group has been the subject of multiple analyst upgrades following impressive financial results. Citi, BofA Securities, TD Cowen, and Jefferies have all reaffirmed or upgraded their Buy ratings for TKO Group, with Citi raising its price target to $137, BofA Securities to $140, TD Cowen to $140, and Jefferies to $150.

These adjustments were made in light of TKO Group's strong second-quarter performance, which exceeded expectations, and an improved forecast for the full year.

TKO Group also reported record-breaking attendance and revenue figures for its UFC and WWE events in the first quarter of 2024. The company made strategic moves to consolidate its market position by merging its UFC and WWE Live Events teams into a single unit, the TKO Live Events Strategy Team.

However, TKO Group is facing a setback in a proposed $335 million class-action lawsuit settlement involving former UFC athletes.

The court denied preliminary approval, delaying the resolution and prompting TKO to explore other options, including a possible appeal and separate settlement talks. Despite these challenges, analyst firms maintain their positive outlook on TKO Group, suggesting a possibility for a new settlement before the trial date.

InvestingPro Insights

Amidst the backdrop of rising sports media rights valuations, TKO Group Holdings (NYSE: TKO) shows a blend of promising growth and market performance metrics. The company's revenue has surged, with a 107.77% increase in the last twelve months as of Q2 2024, reflecting a robust expansion that could underpin future rights negotiations. This growth is further bolstered by a significant quarterly revenue growth of 178.9% for Q2 2024, showcasing the company's strong short-term performance.

InvestingPro Tips indicate that analysts are optimistic about TKO's future, expecting net income to grow this year and predicting sales growth in the current year. These expectations could be a reflection of the company's ability to capitalize on the favorable market trends for media rights deals, as highlighted by Citi. Additionally, the company is trading near its 52-week high, with a price 97.7% of the peak, which may signal market confidence in its trajectory.

However, investors should note that TKO is currently not profitable over the last twelve months, and is trading at high valuation multiples, including a high Price / Book multiple of 5.04. This suggests that while growth prospects are strong, the market has already priced in a significant amount of optimism. For those looking for a deeper analysis, there are over 10 additional InvestingPro Tips available, providing a comprehensive look at TKO's financial health and market position. To explore these insights, one can visit the dedicated InvestingPro page for TKO Group Holdings.

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