Investing in Juventus stock: an opportunity for capital appreciation or a fool’s game
As a Juventus fan and a student of finance, I have always been intrigued by the intersection of sport and business. That’s why I recently decided to review whether investing in the Juventus stock would make sense from a risk/reward perspective (ticker is “JUVE” in Milan Stock Exchange and “JVTSF” in OTC markets here in the United States). I will skip the Juventus introduction…if you are reading this, I assume you already know way more than you need to about the team, its history, and recent developments. My goal with this piece is to add a little capital markets flavor to supplement a fan’s understanding of the team.
With that in mind, I started by looking at a quick snapshot of the business and here’s what I found:
- Declining stock price (83% decline since its peak in 2018)
2. Negative earnings and operating income
3. Multiple capital infusions to help keep the company afloat
In 2020 and 2021, the company raised EUR 700m of fresh new capital to inject into a team whose expenses were outpacing its revenues. As a point reference, Juventus market cap today is ~EUR 900m. Who knows where the team would be without the capital injection in the past couple of years…
Given the negative indicators above, why would an investor think about being a shareholder of Juventus? Here are a few reasons:
First, Secular growth in total revenues (does not include sale of player registration rights) with sponsorships growing at 20%/year for the past 4 years as the Juventus expands internationally and produces new media (e.g. Amazon’s All Or Nothing)
The table below feeds the chart above:
Secondly, new management (Arrivabene, Cherubini) has demonstrated prudent decision making abilities while increasing/maintaining squad quality. More specifically, the wage bill in 2019–2020 was ~EUR135m (net of taxes) whereas the wage bill in 2022–2023 is expected to be ~EUR100m (net of taxes), an impressive 25% reduction in the club’s biggest expense line item. Below, I list the top 10 earners for the team from the past 3 years.
When Paratici (now at Tottenham) added CR7 to the squad, everybody was happy about the addition of such a world icon in the team’s ranks. Everybody was calling for Juventus to win the UCL. Looking back at CR7’s time at Juventus, we can safely say that it did not go according to plan given the club’s finances were absolutely shattered by CR7’s EUR31m wage AND the club was not able to offset those expenses with increased revenues from deep Champions League runs. Since Paratici left, the new management has brought in young exciting players that can deliver lots of quality at a lower cost (Vlahovic, Chiesa) and complementing them with more experienced players who were brought in as free agents (Pogba, Di Maria).
Here are the next few steps that I’d love to see Arrivabene take to optimize the team’s wage cost structure:
- Get rid of Ramsey. The EUR7m/year salary could be used for something else, or just give it to the shareholders
- Get rid of Arthur. He’s still young and Juventus can demand a good fee for him while removing the 5m/year salary
- Get rid of Rugani who earns 3.5m/year and makes 1.5 gaffes/match that he plays. The player is not who management thought he was. Unfortunately, his career and Mattia Caldara’s career have followed a similar path, though Rugani has been able to earn lots more while being equally pathetic at his job as Mattia.
- Bring in another winger/striker to support the Chiesa-Vlahovic-DiMaria attack
Important to note that top clubs like Juventus generally spend more in the transfer market than what they generate from it. The idea being that big clubs spend a lot on players, then these players help the clubs win games, which translates to more TV Rights, sponsorship agreements, and ticket sales that make up the transfer fee paid for hot shot players. Like other big clubs, Juventus has run in a transfer market deficit…until this year (so far). Here’s a view below at how the club has chosen to spend money in the market:
Of course, we have another month left in the summer 2022 transfer window, but as of right now, the Arrivabene/Cherubini prudence continues to prevail.
Third, support from Exor, the largest shareholder of the team has historically provided some support during the team’s most difficult times. Exor, a company founded by the Agnelli family, has proved to be buyer of last resort for Juventus stock, supporting the stock if it falls…much like the United States Federal Reserve Board supported the equities market in March of 2020. I don’t want to comment whether this is good or bad…it just is what it is and we have to accept it. As shareholders of Juventus stock, what does this mean? Every time there is a new equity raise, existing shareholders get diluted, meaning they own less of the company as they did before the raise. However, most shareholders would prefer to own less of a company that continues to exist (investment loses some value) than to own more of a company that goes belly up (investment loses 100% of its value). Because of this dynamic, I think that investing alongside Exor can be beneficial in tumultuous times because it’s likely that the company will not default even if its stock loses a good chunk of its value. With capped losses, the risk/reward discussion becomes more interesting for an investment opportunity.
There are reasons to stay away from investing in sports teams in general and there are reasons to look at the Juventus stock, specifically, and think that there is an opportunity that the team will achieve more with less as we come out of the pandemic (win more while spending less). The new management team has shown excellent signs of financial prudence while remaining vigilant and ruthless when it comes to bringing in the right talent at Juventus. The race against Inter for Bremer, one of Serie A’s top 5 center backs last season, was an excellent indicator of the cutthroat nature that Arrivabene can deploy when necessary. Bringing it all together, I see a business with secular tailwinds around sports consumption internationally (as evidenced by increasing sponsorship agreements, increase in TV rights revenue, and a hopeful bounce back in ticket sales), a management team hyper focused on financial stability following two back-to-back capital injections by shareholders, and a group of players who is much different than the satiated players that last won the Serie A.
Finally, let’s talk valuation and let’s leave out the shenanigans around amortization of player registration rights. Teams try to play around the accounting rules to show the highest profit on paper, but we will ignore that for the purposes of this back-of-the-envelope math. The company’s market cap is ~900m. Add ~200m of net debt, we are looking at ~1.1bn of Enterprise Value. Juventus will likely generate close to half a billion euros in revenue (excluding player sales) in fiscal year 2022. Let’s conservatively assume that this figure does not go up in 2023 fiscal year (ends June 2023). With wages at EUR200m pre-tax, and another 200m of operating expenses, we are looking at an EBIT of ~100m. From an EV/EBIT perspective, the company would be trading at ~11x EBIT, which is not an outrageous figure to underwrite.
The company benefits from a strong brand value, new financially prudent management, and a shareholder base that is focused on the long term performance of a team, whose identity is directly tied to that of the legendary Agnelli family, the people of Turin, and the success of football in Italy. I wonder whether it would be better for me to buy the stock and or invest elsewhere and use those gains to buy a jersey and maybe a ticket to the stadium once in a while. I wonder if the old adage will persist here: “to become a millionaire by owning a sports team, you have to first be a billionaire” or this can be an incredible turnaround opportunity for Juventus stock following one of its worst financial periods during its 125-year history.
Though I am uncertain on the direction the stock will go, there is one thing I know for sure: Fino Alla Fine, Forza Juventus!
