When Callaway (MODG 1.41%) bought Topgolf earlier this year, it transformed the golf club manufacturer into a golf technology and entertainment company. Nearly half of the company's revenue now comes from Topgolf, and it's a business that's still growing at a rapid rate.
As the economy and entertainment spending improve coming out of the pandemic, Topgolf could be one of the biggest beneficiaries. The golfing venue operator generates a whopping $17 million in revenue and $5 million in adjusted EBITDA per venue, and management is hoping to grow from 70 venues today to over 450 -- so this could be a great time to get in on a growth stock for cheap.
Image source: Getty Images.
Callaway is already expecting a big year
Before we get to the growth potential of Callaway and Topgolf, let's look at what management expects for 2021. Here's the company's expected revenue and adjusted EBITDA, which we use as a proxy for cash flow from the business.
| Item | 2019 | 2021 (Estimate) |
|---|---|---|
| Revenue | $1.70 billion | $3.0-$3.1 billion |
| Adjusted EBITDA | $210 million | $345-$360 million |
Data source: Company earnings presentation. Note: 2021 estimate includes only 10 months of Topgolf operations.
This guidance only includes 10 months of Topgolf, which would add about another $20 million to EBITDA if the full year was included. And management said that Topgolf is only expecting to be operating at about 90% of 2019 same venue sales levels, so there's still upside for Topgolf.
For investors, the price we are paying today is actually very reasonable. Callaway has a market cap of $5.4 billion, so at the midpoint of guidance the stock trades for 15 times adjusted EBITDA. That's not cheap on its own, but given the growth potential from operations returning to normal and additional venue expansion, this could be a great value.
Lots of growth ahead
Topgolf itself says it has the potential for 450 venues, and that doesn't include Toptracer range technology or media revenue. The 70 venues the company operates today are incredibly profitable, with construction costs of $10 million to $40 million and expected cash-on-cash returns of about 50%.
Management had 33 new venues under construction, contracted, or under LOI (letter of intent) late in 2020, with a goal to open 10 U.S. locations and over 10 international locations per year by 2022. They see these venues as having the potential to add $900 million adjusted EBITDA business long-term. Like I said above, $5.4 billion for the entire business could be a steal if Topgolf venues alone can generate that kind of EBITDA.
We have also seen entertainment regions like Las Vegas return to levels above 2019 once fully open. I think once entertainment spending from families and corporations returns in full we could see Topgolf venues outperform even 2019 levels.
Toptracer and other technologies are another growth opportunity, although they aren't the majority of the business right now. But if golfers look to play more at home, this could be another growth business long-term.
A great bet on entertainment and golf
As a golf club and ball manufacturer, Callaway struggled to generate great returns as a public company. The golf equipment business is extremely competitive, and there's very little that differentiates any golf company today.
Topgolf puts Callaway in a different position. It has a differentiated and highly profitable entertainment venue, and a technology arm in Toptracer that could redefine how we view and experience golf. I think these will be growth businesses long-term, and given the stock's value today, it's a stock I think is going to outperform the market long-term.
