Live Nation Entertainment (NYSE:LYV) has been on a tear for the last year and I don't expect it to stop anytime soon thanks to operating and strategic initiatives, which are yet to be realized. As seen by recent changes in executive management, I believe Live Nation is currently undergoing a paradigm shift where the new ticketing platform (currently in beta) will perfectly merge the sale of primary tickets and resale tickets.
I believe Live Nation Entertainment will surpass their three-year plan to grow adjusted operating income by 30%-35% by putting greater emphasis on the secondary ticket market and by executing their strategic initiatives. Adjusted Operating Income was $460 million in 2012, and analysts expect this to grow to $600 to $620 million by 2015. Analysts assume that $10 million to $20 million (of the $140 million to $160 million increase in AOI) will be generated by increased secondary ticket sales. But, as outlined below, the secondary market opportunity is far greater and likely will produce an incremental $40 million in AOI.
Source: Company Presentation.
Secondary Ticket Sales Have Become A Legitimate Business
Traditionally, customers mostly bought their event tickets directly from venues or through sale arrangers such as TicketMaster. TicketMaster controlled the primary sale of tickets but the resale of tickets (the secondary market) were either illegal (think scalping) and/or took place through private arrangements with respectable, but largely anonymous ticket brokers, often referred through word of mouth. However, like many businesses, the internet has transformed the secondary market and legal objections generally have fallen. As a result, the secondary ticket market today is a $5 billion business compared to primary ticket sales of $25 billion.
Stubhub, founded in 2000, and today an eBay subsidiary (NASDAQ:EBAY) led this transformation and currently has 40% to 50% market share of the secondary market. A pivotal event was the 2007 revenue sharing partnership between Stubhub and Major League Baseball that further legitimized the secondary market. In fact, now 20% of fans go directly to Stubhub to buy tickets and completely skip TicketMaster, even if the event is not sold out. In addition to Stubhub, TicketNetwork and TicketsNow (a Live Nation company) have 20% and 10% of the market, respectively. The other 25% to 35% of the market is highly fragmented with many players such as VividSeats (<5%) and my company, TickPick which accounts for less than 1% of the market.
The Resale Economic Opportunity Is Significant
Generally, secondary market players earn fees of 20-25% of the ticket prices, creating a $1 billion market opportunity. In 2011, Stubhub sold approximately $1.4bn in tickets, generating $325 million in revenue and $80 million in operating income. It's estimated that Stubhub will sell $2.0bn worth of tickets, generating $470 million in revenue and $115 million in operating income in the 2013FY.
The economics of the secondary market are captured in the following table.
TicketMaster's Secondary Market Business Will Fuel LYV's Growth
LYV currently has $460 million of AOI and the company has issued guidance for a 30-35% increase by 2015, or roughly an additional $150 million. Some analysts believe that reaching this goal could lead to a 30-40% increase in market value. See for example an excellent review by another Seeking Alpha Contributor Live Nation opportunity.
Currently Live Nation is capturing about 10% of the secondary market through its ownership of TicketsNow, and this business is contributing roughly $20 million of AOI. Analysts with conservative estimates believe Live Nation will attain 20% market share through the TicketMaster system by 2015 (thus increasing AOI by $10 million to $20 million). I, on the other hand believe 30% market share is a more accurate and conservative forecast, resulting in $300 million of revenue and an increase of AOI by $60 million to $65 million, putting LYV well on its way to exceeding its AOI target.
Live Nation is uniquely positioned to integrate the primary and secondary marketplace and the high barriers to entry on the primary side will allow them to fend off competitors and achieve 30% market share. Live Nation's beta product, TM+ allows customers to see both primary tickets and resale tickets listed within one ticket system. TM+ is in advanced stages and will be rolled out in 2014.
Besides incremental AOI generated by the resale of tickets through the Live Nation ecosystem, LVY will also benefit tremendously through increased advertising revenue. Furthermore, integrating the primary and secondary market will yield additional benefits to Live Nation's business. These benefits include:
- Fan Friendly Ticket Provider
- Security - Ability to Reissue Tickets & Authenticate Validity (Proprietary Technology)
- Transparency - Display Face Value & Resale Ticket Prices
- Content Creation - Content to Educate Consumers
2. Deepening Relationships
- Increase Fans' Options and Fulfill Their Needs
- Increase Sales for Venues and Artists
- Develop Relationships with Ticket Resellers
- Accumulate Primary & Secondary Ticket Price Data
- Enhance Primary Ticket Pricing
- Utilize New User Information - Enhance Email Campaigns
The table below provides numerous assumptions so that we can calculate a 2015 enterprise value and the implied EV/AOI valuation today and a potential valuation in the future. At today's prices, the company is trading at an implied 7.2x 2015 AOI. Note that the EV is different from what some investors use because the cash balance is adjusted to reflect only cash that is available to the company (versus other cash being held in escrow for payment for future artist performances). Using an 8x EV/AOI multiple would value the equity at $20-$22 a share in 2015 or 20% higher than today.
*Source: Investing 501
Live Nation Entertainment has seen a significant run up in its share price since December 2012 and although I believe they will accomplish and exceed their goals set for 2015, I no longer believe LYV is a screaming buy. With that said, management has already signaled to the market that resale tickets are a high priority. The right steps internally & externally are getting executed, which will help fuel future growth and AOI: none of which I believe is accounted for in today's current share price.