Thesis on Revenue Multiple Expansion Necessary to Invest in NBA Teams at Current Valuations

Thesis on Revenue Multiple Expansion Necessary to Invest in NBA Teams at Current Valuations

NBA team valuations have skyrocketed over the two decades.

For context, Marc Lasry and Wes Edens paid $550mm for the Milwaukee Bucks in 2014. Lasry sold his stake in the club last year at a $3.5bn valuation.

Similar situations played out in both Phoenix and Charlotte.

Robert Sarver acquired the Suns for $401mm in 2004, a then NBA record. He sold the franchise to Mat Ishbia for nearly 10x that amount ($4bn) in 2022.

Michael Jordan reportedly bought a majority stake in the Hornets for $275mm in 2010. He exited in 2023, selling the franchise to an investment group led by Gabe Plotkin and Rick Schnall for roughly $3bn.

But while club valuations have soared, revenues have not kept pace–and in the case of at least one of those teams, its EBITDA actually went backwards during the prior tenure. The bulk of the value created in recent years has come as the result of revenue multiple expansion. 

NBA teams no longer trade at 5-7x revenue, like they did a decade ago. They’re now commanding 10-14x the top line.

That may make it increasingly difficult for smart money to justify buying/buying into clubs in the years ahead, at least if they’re underwriting the investment solely on the expectation of growing revenues. 

“Thinking about the next 10 years, if you’re just planning to grow the business 5-10% YoY at a flat revenue multiple, it will be hard to underwrite to the returns sophisticated investors demand,” one high ranking club executive said.

That’s likely to be the case, even if the league can command another large increase in national media rights revenue during its next round of negotiations, and it expands from 30 to 31 or 32 teams, as expected.

“It is difficult to underwrite transactions that could be nearly 10 years away,” the club executive said. “That represents upside opportunity more than a base case until you get closer to renewal and have a better sense of what terms could be on a new deal.”

The league’s new 11-year deal runs through the 2035-2036 season.

To invest in an NBA franchise today, a return focused investor likely needs to have a thesis around revenue multiples continuing to expand (think: 15-18x by 2035).

One could make the same claim about buying an NFL club.

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That may not seem possible. 

In 2014, the average NBA club would have cost the 400 wealthiest Americans’ ~7% of their average net worth. Today, a middling franchise would fetch more than 20% of it.  

Of course, those estimates assume the absence of leverage and LPs in the purchase process (which is not how these deals are typically structured but helps to make our point).

But Forbes’ 400 wealthiest Americans have increased their net worth from ~$5bn to an average of ~$12bn over the past decade. So, even though clubs cost meaningfully more today, if one of those individuals were to acquire one in full, they would be left with more money after a transaction than owners of the past ever had. 

If one believes that the number of American billionaires will continue to rise over the next decade (and it should), then logic would suggest valuation multiples will continue to expand; simply because there are going to be more wealthy individuals able to bid for these assets.

While Forbes’ list is often cited as a proxy, the reality is the universe of prospective club owners is much greater than that. It’s not a requirement to rank amongst the wealthiest Americans to purchase an NBA team (see: Plotkin and Schnall, Edens and Lasry, Tony Ressler, and Vivek Randive).

And with the league now welcoming institutional capital and sovereign wealth, a motivated buyer has more avenues than ever to raise the capital needed. 

NBA team valuations should receive a lift from the league’s recently signed national media rights deal. Those coming into the league today can underwrite the revenues that will trickle down from the $76bn pact. 

And as the clubs’ business model increasingly looks more like a content company, sophisticated investors may view them in a more favorable light. Remember, media companies tend to trade at higher multiples than live events and ticketing operations. 

But “prospective buyers are going to have to analyze two distinct businesses–one where they have a lot of control over revenues and expenses (ticketing and live events), and another where they have to drive value as 1/30^th of the NBA’s Board of Governors,” the club executive said.

There is little reason to suspect valuation multiples will recede in the years ahead, unless you think wealth creation in America is going to slow down.

“If you think the corporate tax rate and capital gains tax is going to jump in a manner that impedes or stops growth in the number of billionaires and their aggregate net worth going forward, then maybe you would bet against investments in NBA teams,” the club executive said.

There are cases to be made for meaningful revenue growth. They largely center around share of wallet or new business ventures (think: standalone league in Europe and the Middle East). 

But the vast majority of new opportunities expected to arise in the years ahead will simply feed projected annual growth models. For example, a club might earn $5mm more on an annual basis if sports betting gains approval in its state, or an additional $500K if the league opens up the CBD category.

That is OK though. Those buying in today aren’t counting on domestic revenue growth driving returns. 

They’re betting the number of American billionaires and their collective net worth being greater a decade from now than it is today, and that as NBA team brands and fandom grow internationally, that international buyers will increasingly enter the fold helping to keep multiples expanding too.

It’s worth mentioning that most people buying into sports teams aren’t investing solely in the club’s underlying economics, either. They see an incredibly scarce asset that is likely to appreciate over time and will often pay whatever it takes to obtain it.

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