Technology stocks have exploded over the past two years as investors bet that people will be spending more and more time and money on their computers and the internet. What's being left behind are the in-person activities that may not be quite as high-growth or high-margin as their software rivals but are perhaps more cherished now as people venture outside and socialize again.
I think this dynamic presents an opportunity for investors to buy a world-leading sporting goods company like Callaway Golf (ELY +0.97%), recently strengthened by its merger with Topgolf and its golf-hitting bays, complete with bar and waitstaff. This entertainment concept has an opportunity to transform Callaway into a company that is not only highly profitable, but potentially even high-growth through software-related spinoff products.
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Topgolf is the best reason to own Callaway
Callaway Golf is, of course, best-known for its golf clubs and related products. It's one of the industry's leading companies, but the harsh reality is that golf alone is a hard place to make money. In 2020, a great year for the golf industry, golf sales were $983 million and apparel and gear sales were $607 million -- not bad -- but you can see from the chart that the business hasn't been consistently profitable. Moreover, recent growth has been driven by acquisitions of other golf brands.
ELY Revenue (TTM) data by YCharts
Topgolf adds a new concept that's growing organically. In the second quarter of 2021, Topgolf generated $325 million in revenue -- and that should improve as business guests begin to spend again as the pandemic's impact slows.
I think we will see both consumers and businesses increase their spending on entertainment and leisure activities as they get back to a more normal pattern. Holiday parties were largely canceled in 2020, and some companies will make up for that in 2021. This should be a boon for Topgolf.
Topgolf's growth has just begun
At the end of the second quarter, Topgolf had 70 locations but the company thinks it could have 200 venues in the U.S. and another 250 potential locations internationally. In other words, the growth of the business has just begun.
The economics of Topgolf locations are impressive as well. Management says it's targeting average annual revenue per venue of $17 million and $5 million in adjusted EBITDA. Since the company partners with REITs that own the locations, which TopGolf just leases, it can generate a 50% cash return on these venues.
TopGolf also owns a popular, high-tech golf tool, known as Troptracer, which creates a blue line on video screens that traces a golf ball's flight. TopGolf sells the tool to some 7,500 golf clubs and driving ranges worldwide -- in addition to using it at its own locations.
The company is also investing in other technologies like virtual reality. The Topgolf with Pro Putt game for Oculus Quest is one of the most popular games on the VR platform, and this could be another growth opportunity.
Whether it's with physical venues or digital products, Topgolf has a very bright future.
Callaway is a value entertainment play today
Management expects 2021 full-year revenue of $3.03 billion to $3.06 billion and adjusted EBITDA, a proxy for cash flow from the business, of $345 million to $360 million. Remember, that only includes 10 months of Topgolf, and the business wasn't really in full swing until the fall.
Callaway's current market capitalization is $5.3 billion, and given the growth prospects for Topgolf alone, I think that's a great value for investors. This could be one of the hottest names in entertainment as consumers and businesses start to spend more freely again.
