Photo by Maxim Hopman on Unsplash

The COVID-19 pandemic that raged throughout 2020 and well into 2021 had a marked affect on many businesses.

For some, it was a major tailwind, as demand for at-home entertainment, work-from-home enabling solutions, and other home-based products and services took off. Firms like Zoom Media (ZM), Netflix (NFLX), and Wayfair (W) saw their stock valuations soar.

For others, it nearly torpedoed the entire business.

However, for many of these latter firms, the "rebound" off of COVID from late 2021 and through 2022 has completely reversed the stock market trajectory of these two cohorts.

One such "pandemic loser" that has rebounded sharply is also a current Green Screen stock: Live Nation (LYV).

What does Live Nation do? Can it build off of its post-pandemic rebound and continue to grow going forward? Is the valuation in line with future prospects? Let's take a look.

A Dominant Force In Concerts and Ticketing

Chances are, many if not most readers have dealt with Live Nation at some point. The company has 3 business units.

Concerts

Concerts is the largest unit, generating 77% of total company revenue. Live Nation is the premier concert promotion and production firm in the world. The firm produces 40,000 events annually for 5,000 artists. It owns or has exclusive ticketing rights for over 300 venues worldwide, including well-known sites such as San Francisco's Fillmore and LA's Hollywood Palladium.

Live Nation also operates one of the largest music talent agencies, representing over 500 major acts.

Revenues from the Concerts division are primarily gross ticket sales. For events in venues owned by the company, Live Nation also make money from concession sales, parking, and merchandise. Costs include payments to the artists, rent to the venues (for non-owned facilities), and expenses related to marketing the show, setting up the facility, etc.

It should be noted that this is a pretty low margin segment. While it is over 75% of sales, it represents under 20% of company profits, with an operating margin in the low-to-mid single digit percentages.

Ticketing

You've heard of Ticketmaster, right? This comprises Live Nation's ticketing business unit. It is the largest ticket vendor in the world, serving close to 12,000 clients and processing 500 million tickets annually.

Ticketmaster is separate from the concert ticketing business. This is a platform used by 3rd party professional and college sports teams and leagues, museums, theaters, arenas, and others to manage ticket sales for their events.

Using Ticketmaster, clients can sell tickets through a variety of channels, including its website (35% of sales), mobile apps (63%), and box offices (2%). Ticketmaster gets either a fixed fee per ticket or a percentage of the total service fee.

This is a "net revenue" unit. Instead of the full price of the ticket reported as revenue (as with Concerts), here only the fee Ticketmaster receives is recorded as revenue. As such, this is a very high margin segment - over 40% margin. That makes Ticketmaster Live Nation's biggest profit generator, at 40% of overall operating profits, despite being only 20% of sales.

Sponsorship and Advertising

The final unit, Sponsorship and Advertising, is pretty straightforward. Live Nation has a lot of lucrative advertising and sponsorship opportunities at all of its shows and venues. It sells these opportunities out to interested buyers.

Some examples here include: venue naming rights (e.g. Jiffy Lube Live or TD Pavilion), signage around concerts and festivals, online ads, ads on printed tickets, and exclusive sponsorship deals ("official sponsors") for things like beverages, travel, credit cards, and more.

Sponsorship and advertising contributes just 5% of revenue but 35% of profits at an impressive 60%+ operating margin.

The Outlook for Live Events

We said Live Nation was one of the clear losers of the COVID pandemic, and it isn't hard to see why. It relies almost entirely on live events for revenue. During 2020, revenue basically disappeared (it was down 84%). 2021 was better, particularly in the 2nd half of the year, but still only recovered to about half of 2019 levels.

Well, the company is BACK in 2022! The world (except for China, where Live Nation doesn't really operate) has basically re-opened. The company is reporting record attendance and ticket rates. Sales are on track to reach $14.8 billion - that's 28% higher than 2019!

Clearly, this represents a reset year for Live Nation. Prior to the pandemic, this was a firm growing sales at 8-10% annual rates. It is probably prudent to expect those kind of numbers going forward.

Rising ticket prices, acquiring more artists and venues, and international expansion are the growth levers, all of them risky and potentially expensive. This is not really a recurring revenue business, either. Events are one-off sales by their very nature. Overall demand for live events is highly sensitive to economic and geopolitical factors - as we saw in 2020 and 2021.

This makes Live Nation's revenue model "ok", but not particularly interesting. It is "somewhat" rising, and "not really" recurring.

Good Competitive Advantages

Where Live Nation does shine is with its economic moat and competitive advantages.

The company has several UNIQUE ASSETS that its competitors cannot touch. Its exclusive rights to ticket over 300 venues and 500 artists give it huge advantages over competitors like AEG or Jam Productions. Ticketmaster is the largest ticketing network in the world by a good margin, locking out competitors with 3-5 year contracts and maintaining a "brand of choice" advantage due to its size, incumbency, and proven ability.

All told, Live Nation controls over 60% of U.S. concert sales and 80% of first-run ticket sales for all major events. It sells more concert tickets than the combined attendance for all 4 major sports leagues. It has built a solid base of assets and networks that are going to be extremely difficult for a competitor to broach.

The Risks

It is harder to come up with a scarier risk to a business like this than COVID-19. The fact that Live Nation weathered that storm with surprisingly little damage says a lot about the strength of this company.

The main risk is another COVID-like event, one that perhaps drags out longer. Another pandemic, a major world war, widespread terrorist activity, things of that nature, would certainly hurt Live Nation disproportionately. Those are also almost impossible to predict.

Longer-tail risks are mainly around Ticketmaster, which is 40% of profits. It isn't the only ticketing network out there - Tickets.com, SeatGeek, Eventbrite, AXS, and others compete in first run tickets. Conceivably, Ticketmaster could lose clients to aggressive pricing from one or more of these. There really hasn't been much evidence of this to date, to be sure.

Financials, Valuation, and Conclusion

My least favorite thing about Live Nation are its financial statements.

This is an extremely aggressively managed business. Management runs a negative equity balance sheet, carries over $5 billion in debt, and even pre-COVID, operating earnings covered interest obligations by only 2x.

Free cash flow has also been well below what I would expect from such a strong business. It has been remarkably good the last two years - over 20% of revenues - but prior to COVID it was in the 2-5% margin area, far too low. Cash returns on invested capital have fluctuated similarly, although they've been mostly acceptable if not spectacular (10-15%).

Now, on to valuation. I see Live Nation being able to generate long-term free cash flow margins of about 8%. 2022 is a massive revenue rebound year, but going forward I've modeled 8-10% growth annually. Modest share count increases, and a pretty high discount rate of 11.5% (discounting macro and debt risk) give me a fair value of about $75-80.

That is right about where the stock trades today. As Warren Buffett said, a good business at a fair price is a better investment than a fair business at a good price. Live Nation is certainly the former. It looks like a decent buy at present.

Let's wrap up with the 3 key questions...

Does it have rising, recurring revenues? SOMEWHAT. Rising for certain, given the ongoing post-pandemic demand for live events and higher ticket price trends. Recurring, not so much. These are one-off, non-recurring sales in general.

Does it have an economic moat? YES. Live Nation has a nice collection of UNIQUE ASSETS in its exclusive arrangements with popular venues and high-profile artists. Ticketmaster has dominant scale, but unless it uses that scale to be a price leader, I don't see that as a durable moat.

What is the rating? GREEN (attractive). Live Nation has good competitive advantages and reasonable growth potential. It is a better-than-average business currently trading at a fair price. It should outperform the S&P 500 over the next 3+ years.

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