LYV - Live Nation: What About The Shareholders' Interests?

2023-11-13 15:01:34 ET

Summary

• On a shallow look, Live Nation provided impressive third-quarter results that handily beat expectations.
• However, yet again, the entertainment giant was unable to drive operational leverage, saw GAAP margins decline, and continued to dilute its shareholders.
• I view consensus estimates for 2024 as unrealistic, as they assume a major margin expansion for no apparent reason.
• With high expectations and a rich valuation, I expect Live Nation will disappoint investors, and rate the stock a Hold.

Live Nation Entertainment, Inc. ( LYV ) reported third-quarter results that seemingly crushed consensus expectations. However, yet again, a deeper look shows the company is still unable to produce significant GAAP income and continues to dilute shareholders. Even amid a booming year for concerts, the company's ability to provide shareholder upside remains questionable in my view.

With ongoing regulatory threats and growth deceleration looming, I reiterate Live Nation as a hold.

Introduction - Live Nation's Lack Of Emphasis On Shareholders' Interests

In June, I wrote my first article about Live Nation Entertainment, ' Explaining Its 7.1% FCF Yield And Why There's No Upside ', where I dove into the company's business model, operating segments, growth prospects, and risks, as well as described my investment thesis.

In August, I published a follow-up article following the company's second-quarter earnings, in which I analyzed the probability of a Ticketmaster breakup and its potential implications.

For those who haven't been following, I can summarize my thesis by saying I view Live Nation as a great business, but it has a serious problem of not providing shareholder returns and not only by the literal meaning of returns via buybacks and dividends. Live Nation is unable to produce GAAP net income on a steady basis, and it constantly dilutes shareholders despite having a decent amount of cash on hand, even in record years like the one we're currently experiencing.

For context, look at the following graph:

And for additional context, Live Nation generated GAAP net income of over $100M only once in the last decade and had GAAP losses in six out of the last 10 years.

Now, let's overview its third-quarter results.

Third Quarter Review

Revenues grew 32.5% to $8.15 billion, an all-time record quarter for the company, driven by growth in concerts, ticketing, and sponsorship. Gross profit was $1.8 billion, reflecting a 22.3% margin, a 120 bps decrease from the prior year period, caused by higher direct operating expenses in each of the company's segments, as well as a change in the mix with more sales attributed to the lower-margin concerts business.

Operating profit was $619 million, and operating margin was 7.6%, experiencing a smaller 60 bps decline Y/Y, reflecting overhead efficiency and operational leverage. Net income was $483 million, reflecting a 5.9% margin, in line with the prior year period, primarily due to significantly higher interest income as the company's earning a higher return on its ~$6 billion cash balance.

Concerts

Concerts revenue increased 38% to $13.9 billion during the first nine months of 2023 as compared to the same period of the prior year, primarily due to more shows in the United States and Europe as well as the Asia Pacific market, which was largely closed during the first six months of 2022. Concerts had incremental revenue of $417.6 million during the period arising from acquisitions and new venues.

Concerts EBITDA grew 48% Y/Y in 9M-23, and reaching $439 million. EBITDA margin increased by 23 bps, as revenue growth was offset by increased direct operating expenses, increased headcount, and compensation expenses, and higher depreciation and amortization.

Ticketing

Ticketing revenue increased 40% to $2.2 billion during the first nine months of 2023 as compared to the same period of the prior year, primarily due to higher primary and secondary sales volumes driven by more events on sale and upward pricing momentum due to more fan demand and artist mix.

Ticketing EBITDA grew 51% and reached $807 million, reflecting a 279 bps margin improvement, driven by operational leverage in overhead expenses.

Sponsorship & Advertising

Sponsorship & Advertising revenue increased 16% to $840 million during the first nine months of 2023 as compared to the same period of the prior year, fueled by new and expanded sponsorships across all platforms as well as the expanded footprint. Sponsorship & Advertising had incremental revenue of $27.8 million during the nine months from acquisitions of new venues.

Sponsorship EBITDA grew 15% and reached $542 million, as revenue growth was partially offset by a 56 bps margin contraction resulting from higher artist expenses.

Operational Performance

Operational growth was broad-based, as total events grew nearly 13.0% Y/Y to 34,236. Total fans grew 21.4% to over 108 million people, and fee-bearing tickets sold grew 22.1% to more than 240 million. The company remains on track to achieve all-time highs in all three metrics, as the record year for live shows approaches an end.

Unrealistic Expectations For 2024

I think we established the fact that even during a year of unparalleled growth, a record year for concerts, with Live Nation artists like Beyoncé and Bruno Mars filling stadiums worldwide, Live Nation's operational leverage is borderline nonexistent.

In fact, in the more profitable quarters of the year, which are the second and third, Live Nation's margins declined. In addition, as we saw above, the company continued to dilute shareholders and didn't provide any cash returns via share repurchases.

For some reason, that does not bother Wall Street analysts, who according to Seeking Alpha data, are forecasting more than a 37% increase in EPS in 2024. By itself, this number seems off, but combined with revenue growth forecasts for less than 7%, I view consensus estimates as unrealistic.

With ongoing economic uncertainty, less attractive concert lineups, and no sign of a true ability to drive operational leverage, I expect Live Nation will miss expectations, presumably by a significant margin.

And, even if it does deliver, consensus estimates place Live Nation at a 42x P/E multiple over 2024 earnings. I just don't see how this multiple is justified in light of everything we discussed above, combined with the regulatory overshadow, and considering the company's long enough track record of high-single-digits revenue growth at best during normalized times.

At the end of the day, an investment generates returns through earnings growth, multiple expansion, and cash returns. I see no bright future for Live Nation on any of those pillars.

Conclusion

Live Nation operates one of the most desirable experiential businesses worldwide, providing the infrastructure for the world's biggest events. However, underlying this amazing business lies mediocre financials at best.

The company lacks emphasis on shareholder interests, with no cash returns and constant dilution. Furthermore, even amid a record year like 2023, operational leverage is non-existent and GAAP profit margins are declining.

I find consensus estimates for 2024 unrealistic, and even if they are achieved, I estimate the current valuation provides limited room for upside. Therefore, I reiterate Live Nation as a Hold.

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