UBS has initiated coverage of Formula One Group with a Neutral rating, projecting a deceleration in growth for the racing organization in the coming years.
The analysts at UBS have set a price target of $85 for the stock, indicating a shift towards more normalized growth following a period of rapid expansion. UBS highlights that while growth is expected to remain solid, various factors such as lower operating leverage on team payments and limited upside from race promotion will contribute to a slowing trend.
The bank forecasts that Formula 1's revenue and operating income before depreciation and amortization (OIBDA) will grow at compound annual growth rates (CAGR) of 8% and 12%, respectively, from 2024 to 2026. This marks a significant slowdown compared to the 16% and 20% growth rates recorded between 2022 and 2024. UBS notes that the current valuation of Formula 1, at 21 times OIBDA, is near the low end of its historical range, a situation they deem justified in light of the anticipated normalized growth.
The renewal of U.S. linear media rights for the 2026 season is seen as a potential tailwind for Formula 1, with UBS estimating a 1.6 times increase in the average annual value (AAV). However, the analysts caution that the impact of this renewal will be limited, as U.S. rights account for only about 3% of the primary revenue for Formula 1. They point out that viewership has increased only in the low single digits during the current deal, a stark contrast to the 70% increase observed during the previous agreement.
Looking ahead, UBS identifies additional opportunities stemming from the Concorde Agreement and Formula 1's recent $4.5 billion acquisition of MotoGP. While these initiatives may open doors to underpenetrated markets, UBS emphasizes that the benefits will take time to materialize. The U.S. market remains a significant opportunity, with races currently averaging just 30,000 to 40,000 viewers, representing less than 5% of Formula 1's overall U.S. viewership.
Despite the strong cash generation profile of Formula 1, UBS perceives a balanced landscape of risks and rewards. The analysts acknowledge the potential for growth through strategic initiatives but remain cautious about the immediate impact of these efforts. The anticipated deceleration in growth rates reflects broader market dynamics and the challenges of sustaining high growth in a maturing industry.
UBS's analysis underscores the importance of monitoring key performance indicators as Formula 1 navigates this transitional phase. Investors will be keen to observe how the company adapts to changing market conditions and capitalizes on new opportunities while managing the inherent risks associated with its business model. As the landscape evolves, the focus will be on how effectively Formula 1 can leverage its brand and expand its reach in both established and emerging markets.