A Jefferies analyst predicted a 19% rise in Formula One's stock price. What is he betting on?

Analysts at Jefferies have initiated coverage of Liberty Media Formula One shares with a “Buy” rating and a price target of $115, according to CNBC. This implies a 19% upside potential compared to the opening price on September 9. According to Jefferies, the company, which operates in the motorsports and entertainment industries, knows its audience very well, and this helps it build a sustainable business with growing profitability.

Liberty Media is focusing on the “top of the K,” said Jefferies analyst Anthony Bernie, referring to the K-shaped economic model: this means the company is targeting a more affluent audience.

“Formula One’s exclusive partnership with Apple TV in the U.S. underscores the growing value of [top-tier racing] F1. We see growth potential among Apple TV’s more than 20 million U.S. subscribers. Many of them likely fall within F1’s premium target audience, despite the smaller overall target market compared to [the previous rights holder] ESPN,” Bernie explained.

“We also expect growth to come from the expansion of Formula One’s premium offerings (such as F1 Arcade, F1 Drive, VIP services, and race weekend tours), as consumers increasingly prioritize experiences over products,” the analyst added.

Bernie expects that the acquisition of MotoGP (the premier road racing championship) will also lead to higher profit margins. He explains this by noting that MotoGP will adopt F1’s business model, which currently generates several times more revenue from sponsorships and broadcast rights than motorcycle racing, even though its fan base is only twice as large.

Liberty Media's growth strategy, which does not require large investments in physical assets, makes the company attractive in the consumer sector, a Jefferies analyst also noted.

“Formula One’s capital requirements remain modest: its expenses are expected to remain below 3% of revenue during the 2024–2028 fiscal years,” the analyst wrote. “This model, with a low level of tangible assets, supports stable free cash flow generation.”

Formula One shares have underperformed the broader market this year: since the beginning of the year, they have fallen 2.6%, while the S&P 500 index has risen 12% over the same period.

Most Wall Street analysts share Jefferies' optimism: of the 16 analysts covering Formula One securities, 15 recommend buying them (Buy and Overweight ratings). Only one analyst advises holding the stock in a portfolio (Hold), while there are no sell recommendations.

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