The COVID-19 pandemic has negatively affected virtually every company -- large and small -- but Live Nation Entertainment (NYSE:LYV) has been hit particularly hard. As the world's largest promoter of live events, it operates over 270 event venues (theaters, arenas, clubs) and also the Ticketmaster platform.

It is no wonder that the company's stock is down. With social-distancing restrictions in place all over the world, there are no large events taking place, and the company has no way to make money. But this is not a permanent situation. COVID-19 will eventually pass, and concert goers will fill arenas once again. With its long-term potential still intact, should investors add Live Nation to their portfolios?

Cheering fans at a concert with a lit stage in the background

Image source: Getty Images.

A strong long-term growth picture

Before the COVID-19 pandemic, Live Nation was a stock market winner, having soared from a price of $10 per share at the start of 2013 to over $70 per share at the start of 2020. Driving investor enthusiasm has been a compelling growth story of rising concert attendance.

One strong consumer trend has been an increasing preference to spend money on experiences over physical possessions. Live Nation is at the heart of this trend. Concerts and other live events are fun social gatherings with scarce supply -- your favorite band will only perform in your city so many times in your lifetime.

Live performances are also the primary way musicians make money. Perhaps a major musician could make a living selling albums in the past, but today, consumers primarily listen to music through digital streaming services. According to music industry research, recording artists make the vast majority of their money from touring. This has led to an increase in the number of concerts and has bolstered Live Nation's revenue growth.

LYV Revenue (TTM) Chart

Data by YCharts.

Although we don't know how long concerts will be suspended, it is fair to say that musicians and fans will still want shows to take place in the future. In the long run, the industry's growth trend is likely to resume.

Beware of the balance sheet

An important risk that investors should be aware of is the debt that Live Nation carries. As of the end of 2019, the company had $3.3 billion in debt outstanding and $2.5 billion in cash. This compares to $773 million in EBITDA (earnings before interest, taxes, depreciation, and amortization) generated during 2019. It is important to consider how much earnings the company has that can go toward paying interest and debt retirement costs.

Metrics As of Dec. 31, 2019
Total debt $3.31 billion
Total cash $2.47 billion
Net debt (debt less cash) $0.84 billion
2019 EBITDA $0.77 billion
Net leverage (Net debt/EBITDA) 1.1x

Data Source: Company Financial Reports, Capital IQ.

It appears that Live Nation has a sufficient amount of cash and earnings to accommodate its debt load. However, earnings in 2020 will likely come up short due to the widespread disruption from the pandemic.

Also, the cash held isn't exactly cash the company can keep -- $837 million of it is related to tickets sold for events that have not yet occurred and charges owed to clients. There is a possibility that many of those events will be canceled, which means that the cash would need to be refunded to customers.

Live Nation doesn't have any major debt maturities in 2020 and likely has enough cash to weather the storm, but the company's debt load is a risk worth monitoring.

Cash flow seasonality

The COVID-19 pandemic could not have come at a worse time for Live Nation. The spring, summer, and early fall months are Live Nation's most active. In fact, the company operates at a loss during the first and fourth quarters, making up for these losses with strong profits during the second and third quarters.

Quarter Live Nation Operating Income
Q1 2019 ($23.8 million)
Q2 2019 $171.6 million
Q3 2019 $260.0 million
Q4 2019 ($82.9 million)

Data Source: Live Nation financial reports.

Live Nation's profitability for 2020 will be significantly affected by how long the pandemic and the preventative measures accompanying it last.

Take a wait-and-see approach

Live Nation is a fantastic company to own during normal times, but the wide-ranging headwinds brought on by the outbreak strike right at the heart of the company's business. Enterprising investors may want to buy shares while the stock is down nearly 50% year to date, but there is still much uncertainty and risk around how long it takes countries to bring the pandemic under control.

Looking ahead, investors have a lot to look forward to once the business comes back online. Keep an eye on the company's debt position and cash flows in the coming months, as well as management's outlook on its business during the all-important second and third quarters.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.