Formula one shifts into top gear in the Stock Market

Jonathan Boyar, director of Boyar Value Group and advisor to the MAPFRE AM US Forgotten Value Fund

For many racing fans, the Formula One competition is the pinnacle of motorsport. Over 9 months, on courses from Spain and Italy to Australia and Japan, 20 drivers in 10 teams will battle for the cup at speeds of up to 375 km/h Now in its 75th season, F1 racing attracts more than half a billion fans from around the world, with in-person race attendance reaching 450,000 at some venues and the global viewing audience averaging 70 million per race.

Since Liberty Media acquired the business, Formula One revenues accelerated sharply from $1.8 billion in 2017, to $3.2 billion last year (up 25% from 2022). Liberty chairman John Malone, who owns millions of Formula One shares, has a stellar long-term track record with companies under his control boasting a 17% compound annual growth rate dating back to 2006, versus 9% for the S&P 500. Investors that want to go along for the ride can do so by purchasing Formula One shares (FWONA), which is also a holding in the Mapfre US Forgotten Value Fund.

Before 2017, F1’s popularity was on a downward trend, with unique viewers declining every year from 2010 on. But whereas the prior management had a rigid and arguably long-outdated view of what the sport should be, Liberty saw immense long-term potential and is promoting F1 as an entertainment franchise and not just a sports property – an approach that has resonated with audiences worldwide.

Perhaps the biggest game-changer has been the highly popular Netflix series Drive to Survive, which follows F1’s drivers, teams, and owners on and off the track. Now in its sixth season, with a seventh already slated, the show has helped draw a massive new following to the sport, with 40% of new fans now women and the average F1 fan now 4 years younger than historically. Meanwhile, in initially giving ESPN a sweetheart deal for U.S. broadcast rights (a huge potential market for F1 that was historically underpenetrated), Liberty attained broad media exposure for F1, which then allowed it to renew the ESPN contract from 2023-2025 at a 17x annual increase.

Other changes under Liberty’s ownership also broadened its exposure, enhanced business financials, and have been generally well-received by F1 fans. Whether by giving drivers access to social media (which was strictly forbidden under prior ownership), instituting budget caps that have made teams consistently profitable and should help level the competitive playing field between teams, or implementing aerodynamic changes that encourage more frequent passing (which makes races more exciting for fans), F1’s new management has reshaped the business into a media juggernaut.

In 2023 revenues totaled $3.2 billion, primarily from race promotion, media rights, and sponsorships. F1 licenses the rights to host, stage, and promote most of its events, with promoters generating revenue from ticket sales, concessions, hospitality, local sponsorships, and on-site advertising. Initial contracts are generally for 3–7 years, often with annual escalators of up to 5% per year. Promoters include circuit owners, automotive clubs, events organizers, governmental bodies, and more.

Television and other media rights cover race, practice, qualifier, highlight, and repeat broadcasts and usually last 3–5 years, again with annual escalators. Major broadcast partners include DAZN in Spain, ESPN in the United States, Bandeirantes in Brazil, and Sky in the United Kingdom, Germany, and Italy. Formula One also offers its own over-the-top subscription service, F1 TV, which lets viewers follow along from inside the cockpit of their favorite driver while giving them access to replays, live team radio chatter, and an array of real-time stats.

F1 courts an array of sponsors for trackside and digital advertising, yet advertising supply is inherently limited and the exclusivity F1 provides is highly appealing to advertisers (with certain advertising partners gaining the status of “Global Partner of Formula 1” or “Official Supplier to Formula 1,” and so on). Sponsorships usually last 3–5 years, with annual escalators, and are a high-margin revenue stream. F1 appeals to an affluent and diverse consumer demographic, which has helped attracted sponsors as diverse as Heineken (the sole sponsor of pre and post-race coverage on SportsCenter), Mercedes-Benz (the ESPN telecast presenting sponsor), and American Express (which inked a multiyear contract as “the Official Payments Partner of F1” in the Americas).

The business’s largest expense is team payments, a percentage of the commercial rights that F1 distributes to the 10 racing teams. After these payments and other variable expenses (excluding depreciation) F1 generated a 30% gross margin in 2023. Because F1 does not own the teams or tracks themselves, and therefore does not bear the costs of operating these assets, fixed overhead expenses are relatively modest, just 7% of annual sales. In 2023, F1 reported adjusted operating income (excluding depreciation and amortization) of $686 million, a healthy 21.3% operating margin.

As mentioned above, the Formula One competition has historically been underappreciated in the United States, but Liberty’s new approach has altered that paradigm while opening up a massive potential market for the business. In 2017 F1 hosted just one U.S.-based race in Austin, Texas that was nevertheless one of the best-attended races every season (with 440,000 attendees in 2022). Since then, Liberty has added two more circuits, with the inaugural Miami race drawing a record 2.6 million TV viewers in the United States alone. For its counterpart race, the Las Vegas Grand Prix, Liberty itself served as the promoter, with tickets starting at $500 and topping out at $15,000 or more. The whole spectacle represented hundreds of millions of dollars of investment in real estate alone, which is now F1’s primary real estate holding. The Las Vegas Grand Prix is expected to remain an annual spectacle for years to come, and with the most sizable investment outlays already in the past, Liberty should generate robust profits from this event.

We believe an investment in F1 at these levels may prove timely: in recent years, sports media rights and franchise valuations have been racing ever higher, driven by rapidly rising media contracts across the board as well as by the scarcity of these assets and the prestige of owning them. Much like a professional sports team, Formula One is a status symbol – but whereas the Chelsea Football Club and the New York Yankees will always be just one team among many, the owner of F1 holds something truly unique: an entire league. The value of such a holding is widely evident, with Saudi Arabia’s sovereign wealth fund reportedly eyeing F1 last year at a $20 billion valuation. As Liberty now seeks to replicate F1’s success with the MotoGP World Championship (the two sides have agreed to the acquisition and the transaction is pending regulatory approval) amid growing demand for sports broadcasting rights, one thing should be clear to investors: in a takeover scenario where an acquirer seeks to purchase the F1 commercial rights business from Liberty Media, this trophy asset would call for a sizable premium.

Although Formula One is currently structured as a tracking stock (an uncommon structure where shares “track” a business segment that is part of a larger corporate entity), Liberty is making moves to simplify its corporate structure and eliminate discounts among its tracking stocks, steps that may well lead to a spinoff and an eventual sale of the business. Even absent a takeover we think shares are significantly undervalued and utilizing conservative assumptions are worth $88.66 per share or 33% higher from current levels. Through a combination of opportunistic growth investments, improved fan engagement, and media-savvy management, Formula One is now right where it should be: in pole position, with engine revved and the world watching.