The Business of Vice: UFC, Sports Gambling, and Tobacco’s Comeback

0:05Today on Motley Fool Money, Vice is hot again. We'll hit TKO's monster UFC deal, the state of sports betting, and a surprise twist in tobacco.

0:20I'm Emily Flippen and today I'm joined by analyst Nick Sciple to discuss SIN stocks. In particular, these polarizing businesses that have made an increasingly large amount of money off of the worst of human nature. Today, our goal is to answer the question, is today's environment really creating modes for these businesses, or is it just pulling forward returns? We'll discuss what's changing in the industry, who is executing, and where the risks really are. But first, Nick, we have to talk about the news out earlier this week. Paramount, right after its merger with Skydance, has made a deal with TKO Group for exclusive rights to all US-based UFC events starting next year.

0:59It's a seven-year deal with a whopping$1.1 billion a year on average in rights fees. Now, I know we've seen this sprint over the course of the past few years towards live events, especially fights. It's not really up my alley, but Nick, I know TKO Group is one of your largest personal holdings. So I think I know where you stand on this. But I also have to imagine that a lot of our listeners have maybe never even heard of this business or thought about investing in things like live sports entertainment before. What should investors know about this deal? Thanks, Emily. Great to be here with you.

1:31For folks who aren't familiar with the TKO Group, it is the parent company of the WWE and the UFC, a content provider that in this world of streaming where they want to keep folks on the platform all year long, keep them from churning. Both of these are sports that don't have an off-season. They have a marquee event every month and lower level events every week. And streamers are certainly willing to pay up for that. And we've seen that in the past week with this Paramount deal. As you mentioned, Paramount will be paying about$1.1 billion per year for the UFC's content. That's its 13 premier numbered events a year, as well as dozens of fight night events.

2:08All those will be exclusive to Paramount Plus with a number of them also airing for free on the CBS network. This is a significant step up from the prior deal with ESPN on ESPN+. That was about$550 million annually. In addition to this big step up in rights fees, this is a big increase in reach for the UFC. It's moving from the double paywall they were dealing with on ESPN, where you had to be both an ESPN Plus subscriber and pay$80, give or take each month to buy the pay-per-viewed events. To now, this distribution is to all subscribers on Paramount+. Plus, if you pay$8 a month with ads, you can get all the UFC content that you desire.

2:48That's a clear demonstration that media companies are willing to pay up for this content. By all accounts, Netflix, ESPN, many other large streamers were competing for this content. This has been a busy week as well for the TKO group. Last week, WWE's U.S. Premium Live events moved to ESPN on a$1.625 billion five-year deal, almost a double from its previous deal with Peacock, which again, a similar story here. As you move from the Peacock over-the-top network to ESPN, it will now be offered to$30 per month if you don't pay for cable. But if you do, you'll get it for free, significantly more distribution.

3:30If you think about WrestleMania being on ESPN, being promoted on SportsCenter, that sort of thing really increases exposure for the UFC and WWE's content, which is great for the business and for fans. I can totally understand this from TKO's perspective, right? From the rights perspective, it's just a step up. There's mostly fixed costs. So anytime you're able to raise the dollar value of these types of deals, it accrues very easily to a business like TKO Group. But from the perspective of the streamers or these platforms that are paying just insane amounts of money to get this programming, you think to yourself, is it worth it?

4:08Is the consumer demand really there? And I have to say, from my perspective, and granted, I know I realize I'm not the target audience here. I have Paramount Plus for my reality TV needs, not my UFC needs. But that being said, it could be a combination of both consumer demand, but also just affordability of production. These types of live streaming events, moving away towards subscription revenue as opposed to PPV, those are the sorts of things that can drive people to stay and remain subscribed for presumably a much more affordable option. Right. I mean, if you think about too many of these streamers moving toward an ad-supported model, one of those deals I didn't mention, but at the start of the year, WWE's Raw program moved to Netflix.

4:48Netflix, obviously, increasingly moving toward ad-supported content. And in that world, sports really are king. What is a thing that can actually get you to show up on day and date when the content is out there? that is sports content. And while the NFL still remains the king, the NFL has an offseason. And the nice thing about UFC, WWE is they're on all year long. And so you're not going to churn when the season comes to an end. Also, I mentioned for Netflix, the production, right? TKO Group brings all their own production in-house. So it's plug and play when you sign on with this group, which I think is attractive to the streamers as well.

5:24And we didn't even mention the sponsorships that also come out of deals like this. We saw it with TKO Group this quarter, as well as other businesses, but big partnerships, businesses ranging from Meta to Monster and others, Wingstop even, a bunch of great kind of rule breaker style businesses, all paying up to get sponsorships in coordination with these live events. So despite the fact that it's an industry that I think has maybe isolated some investors who probably don't look at the world of UFC or WrestleMania as investable businesses, you can still expand that one step further. That expands to TKO, that expands to Paramount and Skydance or Netflix, all of whom are trying to get stakes into what is increasingly expanding into a really high margin opportunity.

6:09Yeah. The advertising part of the business, I think, is really important. This is a company that is largely driven by its media rights fees, and most of those are behind them now after this the UFC and ESPN deal. However, still lots of meat on the bone when it comes to sponsorship and partnership. Revenue, as I mentioned earlier, big step up in exposure, moving the UFC from the double paywall on ESPN Plus to now largely broadcast on CBS. Big step up in exposure as well, moving to ESPN from Peacock. That additional viewership and exposure and legitimacy also brings in more advertisers. We've already seen that so far since the merger at the time that the TKO business was formed a couple years ago when the UFC merged with WWE.

6:57The WWE was doing$60 million a year in sponsorship and advertising revenue. They did$60 million in the most recent quarter alone. And you mentioned a number of those partnerships. I think there's still lots of runway to increase sponsorship revenue. Also, with that additional exposure, you've had lots of local governments pay to bring these events to their markets. That started with the WWE, with events in Saudi Arabia and other Middle Eastern markets, but you're starting to see more of those happen in the US and abroad as well. While the big rights deals are behind the company, still lots of room ahead of them to monetize this content through advertising and through site fees.

7:39All this, of course, super high margin revenue. You don't have to pay any more to produce your content while you're getting these higher rights fees, site fees, and advertising. This should lead to a significant increase in free cash flow for the TKO group over the next couple of years. In addition to, as I said, continuing to monetize via sponsorship and via site fees, this is becoming more of a capital return story. Last year in the fall, announced a$2 billion buyback. That is going to start up and start working through in this upcoming quarter. And so as that cashflow drops to the bottom line for the business, going to increasingly be returned to shareholders.

8:17It looks like it, Nick, coming up next, we're discussing where all of this plays into sports betting. And if the industry is as lucrative for investors as it is for the house, stick with us. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce into a meeting-ready dashboard showing quota attainment, headcount plan, and monthly revenue to quota by region. In seconds, you'll see exactly what's behind your quota risk and fix it before it's missed.

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9:31That's fool. Sportsbooks are rolling into NFL season with some momentum. Sportsbet leader DraftKings just posted a record second quarter and FanDuel's parent company, Flutter, raised its full-year profit outlook on the back of jumping profits. Now, sports betting is arguably the most popular new age sin industry. And I have to say, Nick, opinions across America seem pretty polarized here. I think lots of people view it as an expansion of freedoms, while others are obviously concerned about the impact it's having on investors as well as individuals' personal lives and financial situations. But is this a type of industry that can accrue value to people who invest in it?

10:09Or do you think that concern around societal perceptions and regulatory headwinds are just too big of a hurdle to overcome? So, I mean, the short answer is yes, this absolutely can accrue real value. While sports betting is controversial, there is certainly product market fit. You can see that by the numbers out there in the industry. So, if you look at online gaming revenue, the most recent data we have is in May, as reported by the American Gaming Association. For online sports betting and iGaming, up 28.8 % year-over-year. That's really translating to strong performance for these betting companies.

10:44You mentioned DraftKings just posted a record revenue quarter up 37 % year-over-year, also reported record net income and adjusted EBITDA. Flutter, same thing, had a beat and raise quarter of the most recent quarter. If you look at these two companies together, they control about 70 % of the market here, which puts them in a position where I think it's going to be quite difficult for them to be disrupted. They can engage in national advertising, have more economies of scale, can already have the customers on their platforms to a large degree. They're also getting better at getting folks to make bets that are better for the house than for themselves.

11:23draft kings credited, quote, higher structural sportsbook hold and sportsbook friendly outcomes for their Q2 results. That really translates to we're getting folks to bet more parlays. They're not winning as much, and therefore we're seeing increasing margins. So listen, I think this is a market where there's lots of demand out there as demonstrated by the increase in betting activity. The two companies that are the leaders in the industry are continuing to put up strong results, and they're getting better at optimizing their businesses over time. So while there's going to be some bumps in the road.

11:52I don't think sports gaming is going away anytime soon. And I think the two companies that own the market today are likely to continue doing so for years to come. Yeah, and probably more likely to get more efficient and scaled at offering that as well. And there's numerous plays on the sports betting market. But to be honest, Nick, sports betting reminds me a little bit of an industry that I know particularly well, also a sin industry, so to speak, and that's cannabis investments. And I have to say, so much enthusiasm around the opportunity and the business behind cannabis. And there's a lot of demand that has grown there, but it really hasn't accrued to investors.

12:24And one of the reasons why is because of the regulatory headwinds that have persisted much longer than many investors, myself included, thought they would. And we do have some news out this week that maybe, again, cannabis could be reclassified for the federal government. I'm not getting my hopes up. We hear this headline about twice a year now for the last five years. But there's been conversations around whether or not sports betting could go the direction of cannabis, which is to say, as evidence potentially stacks up here to show the negative effects that sports betting can have on people's financial lives, that states or the federal government start to be a bit more heavy handed with the regulations they hand down to these businesses that hampers their ability to grow cash flow and revenue.

13:07Is that something that is a concern for you? I mean, potentially, I say this all the time, that if your thesis for or against an investment is the government is going to do X, and that's going to make the company do great, or it's going to blow up the thesis, usually not a great thesis. There are some regulatory potential headwinds to the sports gaming business. Illinois increased their tax on online betting back in 2024, also layered in a per-bet fee that is going to come into effect this football season and has led both DraftKings and FanDuel to, in that state, impose a per-bet fee as well. You've seen the federal government introduce the Federal Safe Bet Act, reintroduced, which hasn't passed yet, but it continues to be talked about that could limit advertising, limit prop bets on college sports, and put some constraints around the business.

14:00Several states have already done that as well. That said, a lot of these are putting guardrails around the business, not shutting down the business. And I think states are getting lots of tax revenue from this. And once states have money coming in, it's very difficult to convince them to turn things back off. The bigger concern, and because also I would say as well, is increasingly entrenches the established players. DraftKings and FanDuel can navigate these regulatory hurdles a little bit more comfortably than perhaps a new entrant could. And so, I think the increased taxes probably entrenched the existing businesses.

14:38One also potential headwind for growth is there's still some really big markets out there that have not yet legalized sports betting. California and Texas are two of those. And to the extent some of that negative sentiment puts a barrier in front of additional states legalizing sports betting, maybe that limits the growth opportunity. But I'm not worried about the market itself getting pulled back. More guardrails putting around the industry, which I think is going to establish the existing players. Yeah. For me, the difference between the cannabis industry and sports betting is exactly like you just mentioned.

15:12The cat is already out of the bag to some extent when it comes to sports betting. Really hard for even individual states to put it back in the bag, so to speak. I will say, though, when I think about the opportunity there, we already see scaling free cash flow with a lot of these sports betting companies. And the months, quarters, and years that go by without further regulatory changes, the more entrenched they get, to your point. The same is true to a lesser extent to cannabis companies. But a lot of cannabis companies, they need rescheduling to happen to release a lot of the tax liabilities that they have just that accrue year after year.

15:46So there's a lot more, I think, clear tailwinds and has been for years for the sports betting industry in comparison to cannabis. Not that they're a one-for-one trade-off, but you see the difference there in terms of how that value is accruing already to shareholders of sports betting companies? That's right. I think the gold rush, obviously this was legalized back in 2018. I think the gold rush obviously carried through for the first four or five years. And now as we're sitting here seven years on from legalization, we're approaching maturity. I think we can point to who the leaders are going to be.

16:15There can be some puts and takes around regulation, but I don't think this industry is going away. So the question is really not if these companies are going to be able to deliver free cash flow, but how much the regulatory environment allows them to capture. And that's really the question you have to answer to decide what the potential upside is for these businesses today. And it sounds like the juice may be worth the squeeze here. Up next, we're discussing tobacco companies, many of which are hitting multi-year highs this year. We'll see you after the break. As an investor, I'm buried in data and making sense of it all is hard.

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17:55It turns out not all sins are headwinds. Just last month, the FDA authorized Juul devices alongside tobacco and menthol pods after years of regulatory limbo. Clearly this is a tailwind. It has kept enthusiasm high for classic tobacco companies. Businesses like Altria Group are now up to 52-week highs. But Nick, we have to talk about tobacco. The most classic SIN industry. Is the enthusiasm for the industry in tobacco stocks based really only around the potential regulatory changes here, or is there something else that's going on that's deeper? Nick Sciple, Ph.D.: I'd say it's both. I mean, if you look at the nicotine industry, it's really been on a tear the last few years.

18:31It's outperformed the S &P and the NASDAQ over the past one, three, and five years. If you look at this year alone, British American Tobacco, Philip Morris, and Altria, which are the big three, the nicotine industry up 66%, 43%, and 30%, respectively. You mentioned Juul, and reduced-risk products really have been a big part of the story this year and really over the past several years. And the U.S. nicotine pouches have been the big attention grabber. If you listen to British American Tobacco, the global nicotine pouch market grew 36 % globally in the first half of 2025, with the U.S. market driving 70 % of the overall market growth.

19:07In the U.S. alone, the industry is up more than 40 % this year. So, really rapid growth for nicotine pouches. And that's come along with regulatory support. Back in January, in the closing days of the Biden administration, the FDA authorized Philip Morris' Zen Nicotine Pouch product, which is the market leader with more than 60 % market share. They noted that nicotine pouches, according to the FDA, pose lower risk of cancer and other serious health conditions than existing tobacco products, provide more potential benefit to existing tobacco users and risks they create to the public, including youth.

19:39So essentially, there's this really fast growth industry in nicotine that if you read the tea leaves of what regulators are doing, is going to be pushed or at least not opposed in the years to come. You're seeing that also in vaping. So you called out a Juul being authorized by the FDA a few weeks ago. That's obviously a huge reversal from the ban back in 2022. If you look back even further than that, the flavor ban put in place in 2020 really has been a regulatory failure so far. While Juul and the big tobacco businesses have pulled out and are not selling flavored vaping products in accordance with the law, illicit products, many of which come from China, have come in to take their place selling strawberry bubble gum flavored vape products.

20:24And today, 70 % or more of the vaping market in the U.S. has been captured by illegal flavored vape products. But we've seen over the past year or so, both at the state level and the federal level enforcement start to ramp up. So 18 states have already enacted vape directory and enforcement legislation. That's about half of the U.S. vaping industry, which is helping to crack down on some of these products. And in July, the federal government jumped in as well. The Appropriations Committee directed the FDA to spend$200 million in fiscal 2026, specifically on enforcement against illegal vape products.

20:59If you think those products are going to come off the market after this increase in enforcement, that should lead to a return to growth for the legal vape market, which has really had some headwinds over the past several years facing these illicit products. While the legal vaping market is down mid-teens year-to-date in the five states where active enforcement is already in place under those directory and registration laws that I mentioned earlier, sales of British American Tobacco's Views products, this is a legal vaping product, increased between 5 % and 13 % in the first half of 2025. Should expect to see further growth as that enforcement ramps up.

21:32All this to say the regulatory environment for reduced risk nicotine products has moved from prohibition, as we saw a few years ago with Juul and the flavored vape industry, towards risk reduction. That's changed market perceptions for the nicotine business and the durability of the cash flows those companies can deliver. You see that in valuation. Just for one example, British American tobacco, back at the start of 2024, had a free cash flow yield above 15 % as we sit here today, down to about 9%. You've seen a similar shift over from Altria as well. For my part, I think nicotine sales aren't likely to shrink over the next decade.

22:09I think as reduced-risk products start to ramp up and continue to take share, I think we can at least hold water. I wouldn't be surprised if we see nicotine consumption move higher a decade or more from now than it is today. If you believe the commentary for many of the tobacco companies at maturity, these reduced risk products like vapes and nicotine pouches should carry structurally higher margins than legacy tobacco products. The way the regulatory environment is developing, probably not going to see a lot of new entrants into this industry. The companies that control the tobacco, the nicotine profit pool today likely to be the companies that continue to control the profit pool in the years to come.

22:45If that's right, I think these companies still have quite a bit of room to run. If you look back to the 2017-2018 period, these companies were carrying dividend yields sub-3%. British American Tobacco is still above 6%. Altria is still close to 6 % as well. As attitudes around the durability of nicotine sales shift and as these reduced risk products continue to gain share, I think there's still some upside for the nicotine space. Nicely said. And if I had one way to kind of sum up the conversation, it sounds like for every investor, their engagement with like SIN stocks or SIN industries, I think is going to be dictated by where their own personal lines are drawn.

23:23Some people would never touch the space, won't even invest in the index fund if it potentially invests in these types of businesses, whereas others see value where some people may not be willing to fish. And I think ultimately where that line is drawn is up to each individual investor and listener. But for people who are willing to venture across paths that others may not go down. It sounds like there's relative value to explore, especially in these industries that have been written off by so many people. That's right. When I think about SIN stocks, I don't know if David Gardner would agree with me, but if you think of sign six of a rule breaker is grossly overvalued according to overall market commentary.

23:58As I read that, people just throw something out without even thinking about it because it looks too expensive. I think SIN stocks rhyme with that in a lot of ways. There There is a segment of the market that people, because it's controversial or for whatever reason, their own personal experience with it, they throw it out and don't even ever look at these businesses. And I think if you look at some of these, especially nicotine over the past several years, the structure of the market is changing in a way that is supportive to these businesses. And I think as more and more people look at that, that's more and more people who are potential buyers.