Eric Broder Van Dyke
Live Nation Entertainment (NYSE:LYV) has a material upside of 100%+ based on our revenue/adjusted EBITDA estimate. LYV has delivered solid numbers over the course of FY’22, beating analysts on both revenue and margins. The stock trades at a discount due to temporary news headwinds, and uncertainty on the long-term growth outlook. We believe that a more material upside case can be argued despite some negative headwinds.
LYV has come under heavy scrutiny from various members of the music community due to the near monopoly-like nature of its business model following the merger of Live Nation and Ticketmaster in 2010, which then formed the combined business entity of Live Nation Entertainment today.
Following the merger, the company has engaged in various activities to bolster its competitiveness to the extent that various critics in the music industry who have attempted to host concerts outside of Live Nation venues have been unable to do so with much success. We’re talking about real Hollywood heavy hitters being unable to find meaningful traction off Live Nation Entertainment’s Ticketmaster platform such as Pearl Jam.
Billboard recently published an article that highlights a lawsuit filed against LYV due to ticket sales tied to a Taylor Swift concert. Though the criticisms of the ticket sales seem justified, it also highlights the greatest risk long-term investors should be aware of. There’s no form of natural competition. So, the business could always come subject to further regulatory scrutiny, which has been the biggest overhang on the stock.
Live Nation Entertainment’s poor stint seems temporary at best
The stickiness of the platform is the greatest positive to take away from all of this. So as long as LYV navigates its monopolistic position intelligently we think there’s a strong runway to growth, and achievement of our price target hinges on a quick return to live events and expansion of demand following the pandemic. We love the portfolio of events, which ranges from in-demand tickets for NFL, NBA, MLB, NHL, opera, music, and even theater.
The recent weakness in stock price could largely be explained by the ongoing challenges tied to ticket scalpers, recent technical failures tied to ticket sales, and potential fines and penalties to a DOJ investigation that has found LYV guilty of breaking some of the antitrust provisions that were conditional to the merger being approved back in 2010. LYV reached a peak of $126 in early February 2022 versus the current price of $73 per share representing a 42% drop from the all-time high.
According to Hollywood Reporter:
In 2019, the DOJ found that Live Nation had been violating the terms of the settlement by forcing venues to accept Ticketmaster’s ticketing services as a condition for hosting Live Nation performers and retaliating against those that refused. The agency, in turn, threatened to assess monetary penalties for additional violations and installed a monitor tasked with investigating further breaches of the consent decree, which was extended until 2025.
Even with these added risks, and the exhaustive effort into explaining the risks, we think of investing into Live Nation Entertainment like Meta Platforms (META) stock. Does Facebook have a monopoly on social media (yeah mostly), do people actually like Facebook as a company (probably not), do bulls in Facebook care about how consumers feel about the company (no probably not)… and so investing into Live Nation Entertainment is going to feel a lot like being invested in Facebook, and Mark Zuckerberg (if you ever know how this feels).
The reality is, people in the music industry are somewhat nervous of the monopoly that has been built and criticizing Michael Rapino (CEO of LYV) could have devastating consequences. Some artists could lose their music royalties, or access to concert tours, or lose their deal with the record label.
Basically, the bad press is going to be heavy with this stock and lawsuits are likely to pile-up. Even with all the bagged-up negativity, there’s a contrarian thesis even during a negative news cycle.
Eye-popping numbers yet the poor stock performance?
Key metrics like profitability, ticket sales, and pricing were highlighted among analysts. For example, David Karnovsky at J.P. Morgan continues to reiterate his positive stance based on just business fundamentals reiterating many of the solid points bulls have been making on the stock.
J.P. Morgan analyst David Karnovsky on Live Nation Entertainment Q3’22 results:
Adjusted operating income of $621m was well ahead of consensus, and the 45% increase relative to 2019 was similar to last quarter. Ticket sales for shows up y/y (with gains across venue types), confirmed sponsorship up 30%, and event deferred revenue up 35%.
JP. Morgan analyst David Kanovsky on Live Nation Entertainment Q2’22 results:
LYV’s Q2 results were well ahead of consensus Adjusted operating income of $480m was up 50% over 2019 (inclusive of a 4% currency headwind), with impressive growth across a number of key metrics. Onsite spend per fan increases at amphitheaters and festivals season-to-date, expectations for North America to drive more fan growth in the quarter, and likely greater activity in APAC markets, which were still limited in Q2.
Sentiment remains positive among wall street analysts, and we think the underlying driver for this is solid fundamentals and a surging growth thesis that’s very difficult to criticize.
Though the merger of Live Nation and Ticketmaster was somewhat ancient history, it helps set the precedent for what has become a two-legged thesis… and this is just our opinion, but the music industry hates Live Nation Entertainment. Much of the commentary published by insiders who have worked in the music industry has a negative slant in the way they talk about the company.
And while we’ve seen this story before with consumers taking up arms against companies for exerting too much power… the consensus gives the stock credit where credit matters, the company produces solid earnings results. As analysts, and investors, we’re looking for an opportunity to generate returns. Buying the stock makes a lot of sense if publicity improves. Live Nation Entertainment has a great investment case on pandemic-themed recovery but has to manage a nagging publicity nightmare at the same time. This is what Wall Street analysts have conveniently ignored.
As a large/mid-cap stock at a $17B market cap, it carries substantial return potential as it matures into a larger cap company, as such we find ourselves willing to stomach some of the near-term pain tied to public relations and fines in order to generate some long-term alpha. It’s a matter of whether or not Live Nation Entertainment can transition as effectively as Microsoft (MSFT) and Alphabet (GOOG) (GOOGL) after establishing market dominance. A great case can be made for Live Nation Entertainment on this basis, which is why we think there’s material upside in the stock.
Strong numbers and recovery from pandemic create a bias for investing into the company’s stock
Figure 1. Historical revenue growth and growth comparison
YCharts (YCharts)
As you can see in the historical revenue chart, the business reports results on a seasonal basis, with Q2 and Q3 being the seasonally strong months of the year, whereas Q1 is the weakest quarter, and Q4 results are lower than Q3 results usually. The 2020 pandemic restrictions put immense pressure on revenue, the company went a couple of quarters without any meaningful sales. It’s why Q3’22 revenue growth of 128% y/y sounds so inflated, and it’s why both the management and analysts’ consensus reference growth in comparison to FY’19.
On that basis, the company reported 67% y/y revenue growth in Q3’22 when compared to Q3’19, which is why investors and analysts are caught scratching their heads. If the business managed to expand by so much in comparison to pre-pandemic levels, why isn’t it reflected in the valuation?
However, on an organic basis, the business seems to be executing at all levels, which is why we feel confident in embedding a more aggressive growth estimate (which we will discuss in our valuation and estimate section). We anticipate that given the stickiness of Live Nation Entertainment’s positioning in the concert ticketing industry, the business will be able to sustain its high profit margins, and reinvest more effectively in expanding marketing, and venues for more live events.
There’s a lot of pent-up demand for in-person experiences still, as the economic recovery has been broadly labeled a “job full recovery” as opposed to the 2009 “jobless recovery.” Meaning that consumer spending is mostly supported by wage growth and growth in manufacturing jobs, and with employment indicators showing signs of strength we think there’s a lot of untapped potential in the ticketing business and anticipate a number of factors to carry growth into FY’23 and beyond.
Furthermore, as a category, event spending isn’t as interest rate sensitive and isn’t likely to be impacted by rate hikes as opposed to real estate, automotives, paymentech, and financials. It’s why we view this company as a rare field alternative, as consumers buy tickets to go to events regardless of what the prevailing credit card APR, or mortgage rate is. makes intuitive sense to bet on growth stocks that are likely to outpace the inflated interest rate environment we’ve landed ourselves in.
And so if we have to find a way to beat inflation during another era of Reaganomics why not Live Nation Entertainment? It’s perfectly positioned ahead of a bucking consumer base that wants to participate in live events, and willing to pay anything to get out of the house.
Long-term growth and valuing the business
Currently, the consensus estimate on FY’23 or the upcoming year seems excruciatingly conservative, as FY’23 revenue estimate of $17.23 billion implies 8% y/y growth, as pull-forward demand from pandemic-themed recovery subsides. This is what wall street estimates have arrived at, and upon looking at the underlying drivers for revenue growth, we think a normalization to high single-digit revenue growth seems improbable given the increase in average pricing and the amount of tickets sold on aggregate. According to the most recently released earnings release, the company generated a 37% increase in total ticketing volume year-to-date when compared to 2019, and average pricing increased by 23% on average, which is why revenue grew by 67% when compared to FY’19 results.
We actually think there’s a strong case for a combination of ticketing growth and also pricing growth in FY’23 as well. Mainly because China has started lifting restrictions on live events and will begin accepting performance applications from February 16th, 2023 onwards. This means that the resurgence in China themed events will start to have an impact on total ticketing volume as we progress through FY’23 thus adding even more pull-forward demand from event-starved Chinese customers.
Also, the continued growth in existing ticket pricing could keep growth at elevated levels in FY’23, which is why we estimate a more aggressive top-line estimate on the basis of 20% growth in total ticketing/gross ticketing volume, and a 10% increase on average pricing, which would translate to 32% revenue growth for FY’23 or FY’23 revenue estimate of $21 billion. Keep in mind, our revenue estimate is higher than the consensus estimate of $17.23 billion by a substantial factor, and the highest revenue estimate among consensus analysts is $20.39 billion.
We’re erring on the absolute high-end of the range, because management doesn’t provide revenue guidance, and sell-side estimates are designed to be beaten. Given the impact of consumer-fueled recovery, we think there’s room for higher ticket pricing, and accompanying growth ties heavily into the upcoming performance slate of artists, which we think Hollywood has built up a massive pipeline of media talent in anticipation of a return to normal activity.
Therefore, we think event-driven activity is also driven by a greater amount of supply, or availability of talent and the amount of talent available that can go on concert tours. From what we understand, many of the more established singers and actors went on hiatus and are now working up a frenzy to make-up for lost revenue. In other words, we think supply can also keep pace with ticketing demand, and assuming the company does a great job of managing musical talent and releases new hit singles with new musical talent the rising tide can be expansive for everybody… including the music artist.
How do we arrive at our price target and valuation?
In terms of our conforming profit per share calculation, we apply a 10.3% adjusted EBITDA margin to the top-line revenue figure to arrive at $2.16 billion in adjusted EBITDA, which compares to consensus figures at approximately $700 million – $1 billion in adjusted EBITDA.
We then value the firm at 18x FY ’23 Adjusted EBITDA, or in-line with the average EV/EBITDA multiple of 18.4x for the tech sector. As such, we arrive at a $38.9 billion valuation, and discount the valuation by 9.3% based on the firm’s WACC to arrive at a discounted valuation of $35.28 billion, we then arrive at our 12-month Price Target of $152, which is way higher than the highest sell-side analyst price target of $120.
Our price target compares to another analyst on Seeking Alpha who came up with a valuation of $167. Our approach is different from every other analyst who covers the stock, as the company would have to deliver a material revenue beat by a significant margin to justify our PT of $152. In other words, business fundamentals drive the material upside case to our target not multiple expansion. Instead, we expect continued multiple compression, so great numbers will trade at a discount due to bad press.
This is why even with a material beat on revenue/adjusted EBITDA we attribute way less multiple expansion to achieving our price target than other analysts. This is also the most likely scenario. Expectations hinge primarily on multiple expansion to reach price estimates. The consensus doesn’t actually expect the gravy train in terms of growth to continue much further, or for the company to beat to such a ridiculous extent. Even so, we think that’s the most likely scenario, substantial revenue beat and profit expansion leads to substantial stock price momentum.
Our $152 Price Target implies 106% upside from current price levels
The current consensus price estimate is $100.50. Our price target is 50% above the current consensus price target. We believe our estimate is achievable, and the reason why our estimate doesn’t conform with consensus has much to do with the timing of our forecast. Typically, sell-side analysts will update their models to reflect the year-end outlook from Q4 earnings, but because LYV hasn’t reported Q4 ’22 earnings, there’s no FY’23 outlook or guidance to base estimates off.
Personally, we’re not patient enough to wait around for management’s outlook to figure out what the regression in FY ’22 to FY’ 23 sales will look like, for all we know our FY’23 revenue estimate of $21 billion proves to be too difficult, and we have to cut back our expectations on sales growth. Or, if the pent-up demand for live events carries into FY’23 our estimate on revenue comes across as conservative.
In either case, we’re not convinced by the sudden 154% y/y sales growth trickling to a growth rate of 8% in 2023. There’s something inherently wrong with the consensus model, and it’s why we think there’s an opportunity to generate alpha from Live Nation Entertainment because there’s almost no hype priced into the stock with a blistering growth/recovery narrative. We rate the stock a buy, and anticipate a continuing string of beat and raise quarters to keep investors wedded even with scandalous news putting a ceiling on forward multiple expansion.
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