LYV - Live Nation: Rapid Growth But Still Not A Name Worth Buying

2023-04-05 14:27:09 ET

Summary

• A solid revenue curve and a potential undervaluation are the pros here.
• Debt levels are increasing steadily, although are serviceable for the moment. Tightening monetary conditions though will likely restrict its ability to expand.
• Potential future regulatory concerns are also a shadow over an otherwise rapidly expanding company.
• At this time I have to issue a sell/avoid recommendation on this name, although if regulators provide more clarity then another look is warranted.

Live Nation (LYV), with a current market capitalization of $15.9B and enterprise value of $18B, is the premier provider of live entertainment, earning revenue through concerts, ticketing and sponsorships. They currently own about 260 venues, put on events at third-party rented venues, and operate a ticket resale marketplace. Ticketmaster was purchased by Live Nation in 2009, and this segment covers all ticketing, while the Live Nation brand covers promotional and advertising revenue.

Revenue

Live Nation has seen a sharp rebound in revenue as the world exits the pandemic. Trends have pointed to a sharp uptick in spending on events, as during COVID, consumer spending was focused on items, instead of experiences, creating pent up demand.

What's most compelling about LYV is its revenue trend over time. Take a look at the fantastic 45-degree angle of the revenue curve. This is a company capable of growing quarter after quarter. Its estimates are targeting big increases all the way through 2025.

Debt

In order to get through the pandemic, Live Nation was forced to raise a sizable amount of debt. Pre-pandemic, long-term debt sat at just over $3.7B, this number is now about $6B. In their 2022 10-K, this leverage is addressed.

This increase in leverage will most likely restrict the company from raising new debt in a rising interest rate environment, repurchasing shares, and making new investments. Given that most of this debt ($5.1B of the $6B) is fixed rate, they should have no issues servicing interest expense barring another unforeseen event forcing them to cancel customer purchases.

Their cashflow statements show them as remaining mostly cashflow positive for all quarters up to Q4 of 2022, and that same quarter shows them ending with a whopping $5.6B in the bank. They also have a current ratio right about 1.0, further lending credence to the idea that they will have no issues servicing their debt load.

Still, the high debt and increasing it year after year is concerning. Especially now in tightening credit conditions they'll find it far more difficult to continue their expansion at the same rate.

Shares Outstanding

One thing of particular note with LYV is that they have been issuing shares virtually every quarter. Now issuing shares isn't a huge red flag, but doing it consistently over time is diluting the share pool. I'm very hesitant to issue a buy recommendation on any company that does it, because over time it will erode value for its shareholders. Generally when I purchase a company I want to see the exact opposite of this chart.

Valuation

Live Nation is currently trading at 1.1 EV/Sales. While EV/Sales has contracted abruptly, it is important to remember that because of shutdowns during the pandemic, live events were essentially paused. Prior to the pandemic, EV/Sales was anywhere between .7 and 1.4 from 2013 - 2019. As a result of COVID, the best year to compare 2022 results to, is 2019. 2020 saw revenues drop to just $1.8B, while revenue is expected to exceed $18B in 2023.

Compared to industry peers, in the chart above, we can see that LYV is coming in near the bottom of the list indicating that it could be nicely undervalued in its market segment. Although it's important to remember that it doesn't really have a direct competitor since its purchase of Ticketmaster. Let's address that.

Regulatory Risk

Live Nation has faced scrutiny as they are such a dominant force in the music industry. Not only are they coordinating most large tours, they also can provide the venues and ticketing. After an uproar regarding ticketing for Taylor Swift, the DOJ reportedly opened an antitrust investigation. It is important to note that the DOJ approved the acquisition of Ticketmaster after heavy scrutiny in 2009, but the current administration has taken a tougher stance on antitrust. Historically, we have seen very few examples of breakups occurring at mid-cap companies, but while the DOJ is on the case it is important to handicap this situation accordingly.

Live Nation addressed these concerns head on and made clear that artists and their management are responsible for choosing Ticketmaster and Live Nation. They argue that they are the go-to choice because of the quality of services they provide and scale they have achieved.

While their arguments on the matter might sound persuasive to the layman, we have to remember that the current administration is quite litigious when it comes to antitrust laws. That means that LYV could potentially face future scrutiny.

Conclusion

While there is clear upside when looking at valuation and revenue, the regulatory concerns and debt overhang make it difficult to buy Live Nation shares with confidence. And we want to be sure of our purchases, right?

The regulatory risk and increase in debt may be priced in as shares have sold off 38% in the last 12 months, but there is no real margin of safety. In a situation where there are potential regulatory issues as well as continued dilution of the share pool it's probably wise to just move on.

The valuation may be attractive, but it requires very specific insights and expertise to understand the future of Live Nation from a regulatory and antitrust standpoint. If clarity is offered from regulators, it would make sense to revisit this name, but until such a time my recommendation is to sell if you have it and avoid it if you don't.

For further details see: