The golf business has been hot over the past year, one of the surprise industry winners coming out of the pandemic. But that may not be the end of growth for Callaway Golf Company (MODG 0.77%).
Callaway recently acquired the golf entertainment company Topgolf, launching itself firmly into the world of food, beverage, events, and golf technology. And this could be a platform from which to grow Callaway and golf more broadly around the world.
Callaway brings Topgolf aboard
The merger with Topgolf was one of equals more than anything. Callaway shareholders kept 51.5% of the company, but Topgolf shareholders (excluding Callaway's stake) own 48.5% of the company.
From a revenue standpoint, the combined companies had $2.76 billion of pro forma 2019 revenue and $270 of adjusted EBITDA. That was obviously impacted by the pandemic, which closed some of Topgolf's locations for a period of time. But by 2022 the company expects to generate $3.2 billion in revenue and $360 million in EBITDA. And that could be conservative given the growth under Topgolf's growing business.
Topgolf is the path to growth
If you aren't familiar with Topgolf, you're missing one of the most popular entertainment concepts in the U.S. The company has 58 venues in the U.S. and five internationally, attracting 23 million visits in 2019, or 365,100 visits per venue. In 2019, those venues generated $1.06 billion in revenue, or $16.8 million per venue (without pulling out Toptracer). Management thinks there's an opportunity for 450 venues worldwide, so the Topgolf venues alone are a big market.
What could take the Topgolf merger over the top is the company's investment in digital tools. Toptracer range products allow any range to add tracer technology used on televised events. And Pro Putt in virtual reality is making golf and VR fun and social.
Topgolf is adding the kind of innovation golf has needed for years, and that could ultimately turn Callaway into a growth stock it's wanted to be for a long time.
Callaway looks cheap long-term
Callaway's market cap of $5.45 billion isn't terribly expensive when compared to the pro forma EBITDA of $360 million in 2019. And we know Topgolf's revenue was already about 8% of 2019 levels in October 2020 when the deal was announced, which should have improved significantly since then.
Consumers and corporate groups are beginning to plan more and bigger outings, but there's less capacity for entertainment than there was a year ago. The companies left standing, like Topgolf, should see a bonanza of demand. And when you consider that growth on top of how Topgolf is expanding into digital offerings like Toptracer and virtual reality, this is an entertainment stock with a high-growth future ahead.