Just like any stock on the NASDAQ or NYSE, you would only purchase stock of a player who you think has potential to grow or you consider undervalued.
Recently, Fantex announced they would be selling shares in the future earnings of NFL player Arian Foster. Although the Texans RB is injured, and the sale of his shares delayed, Fantex has broken the barrier of brokering professional athletes' salaries. This post will explain exactly what that means - and if it's a good investment for you.
So How Does it Work?
Just like any stock on the NASDAQ or NYSE, you would only purchase stock of a player who you think has potential to grow or you consider undervalued. If the player’s value grows by merit of performance, so does your stock's value (profit). Fantex is only allowed to sell up to 20% of Arian's salary which they purchased for $10 million in cash. This means that Foster’s future income is estimated to be $50 million. At $10 per share, Fantex is selling stock in one of the most popular athletes in the NFL - but that doesn't necessarily mean that Foster is offering a deal that you should take.
If you think Arian Foster will earn more than $50 million before he dies, then you are “long” (expect the stock to grow) and should probably buy shares. However, if you think Arian will not earn more than $50 million before he is finished, then you are “short” and should not purchase shares.
What is the Fair Value Then?
Well, let’s examine this stock just like analyst on Wall Street does. First, look at the market (supply and demand) and then look at historical factors for past performance indicators. Currently, Arian’s salary is around $5.25 million a year, and at that rate he would have to play another ten years to give shareholders a 5% return on their stock ($52.5 million = 5% increase from $50 million).
But Foster is 27 years old playing the most short-lived position in the league (2.57 year average career) and entering his 6th year with the league. The questions to ask are: What is the going rate for a RB at 28 years old? Will his past injuries discount that? Will a supply of talent (NFL draft, free agency) lower his price?
But wait, there's more: the 20% stake Fantex is selling is not only applied to Arian's football career. It also includes all earnings - endorsements, speaking fees, and any other entrepreneurial activity he undertakes. Yes, there is much potential there, but much still depends on his performance. Although Arian is quite the performer, his less-than-Hall-of-Fame status at the moment can only carry him so far and $50 million is a long way to go.
What's the Catch?
There is no "catch" per se. Arian is simply taking a cash sum ahead of time - it's a smart decision in case anything bad happens to his career. However, since he still owns 80% of future earnings, there is incentive to keep earning for himself - so you don't have to worry about him "cashing out." Fantex also wins but they have to do a little work first: if the company sells all $10 million worth of shares, they pocket $500,000 in brokerage fee (called "underwriting") - done deal. However, the investors, like yourself, are taking all the risk because your shares' value is now in flux depending on the company's/player's performance both on and off the field.
Yes, Arian Foster is one of the most marketable players in the league and has good earning potential - Fantex makes it a point to only contract the most attractive brands in the sports world. However, if he gets injured again or retires sooner rather than later, can anyone determine what his future outlook looks like? That’s where you come in… invest wisely!