We're getting close to Memorial Day in the United States, which means it is almost summer. One activity many people around the globe will be participating in this summer is golf. The sport has grown in popularity during the pandemic --it's easy to social distance on the course -- benefiting equipment and apparel sellers like Callaway (ELY -1.96%).

However, Topgolf, which Callaway acquired in 2021, fared poorly during the earlier phases of the pandemic as social distancing efforts and the decline of in-person events cut into the traffic visiting its high-tech golf entertainment complexes. As we head into summer 2022, Topgolf is recovering nicely from its pandemic slump.

Yet, Callaway's stock is down 28% year to date. Does that mean it's a good time to buy shares?

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Strong equipment and apparel sales

Callaway reported its Q1 earnings on May 10. Golf equipment sales rose 24.2% year over year to $468 million. This is the legacy business that features Callaway's branded golf clubs and balls, plus Odyssey putters. The business is growing nicely and is Callaway's most profitable segment with $101 million in operating income last quarter, or a 21.5% operating margin. Don't expect this business to grow rapidly each year, but it should be a nice source of cash to fund management's growth ambitions for Topgolf.

The apparel and gear operating segment also showed strong growth. Net revenue increased an impressive 37.4% year over year to $250 million with an 11% operating margin. The segment houses its Travis Matthew, Ogio, Jack Wolfskin, and Callaway fashion brands. Of these, Travis Mathew is the most important with its retail stores putting up phenomenal 50% same-store sales growth in Q1. It also just launched a women's clothing line to expand its addressable market.

Callaway is getting solid growth and profits from equipment and apparel, but it is the company's third segment that will drive the majority of growth over the next decade: Topgolf.

Growth will come from Topgolf

Callaway acquired the golfing entertainment and technology company for $2.66 billion last year (excluding the part of the business Callaway already owned). Topgolf operates large driving range venues that sell quality food and drinks, and offer catering for group events and parties. It also owns the Toptracer technology, which is used by the PGA Tour and licensed out to driving ranges around the country for an annual fee.

In Q1, Topgolf's pro forma revenue was $322 million, up from $236 million in the prior-year period. The segment was barely profitable, with a 2% operating margin, but that is because it is still investing heavily in growth and recovering from the impacts of the pandemic. However, there are good signs the business is recovering its momentum. Same-venue sales were up 2.3% in the quarter compared to the same period in 2019.

Over the long term, Callaway plans to grow Topgolf by opening up around 10 new locations each year as well as by driving same-venue sales growth. With less than 100 venues operating around the world, the company should be able to add locations at that pace for at least the next decade without hitting market saturation. This could help it grow Topgolf's revenue at double-digit rates for many years.

What about the valuation?

As of this writing, Callaway has a market capitalization of $4 billion. Add in its net debt of $1.71 billion and its enterprise value (EV) comes to $5.71 billion. There are a few ways to value Topgolf's business. First, we can look at its 2022 adjusted EBITDA guidance range of $535 million to $555 million. Based on the midpoint of this range, the stock is trading at a 2022 adjusted enterprise-value-to-earnings ratio (EV/E) of 10.5. This seems quite cheap on an absolute basis.

But there's more to the Callaway story. The company is investing hundreds of millions into Topgolf -- an estimated $230 million this year alone -- as it builds out locations around the United States. This will lower the company's consolidated free cash flow for many years, making it tough for the company to return cash to shareholders via dividends or share repurchases. That's not to say investors won't see an increase in value because of the returns Callaway will get from this invested capital, but some of it will be delayed. 

Overall, now could be a good time to buy Callaway shares given how cheap its forward earnings multiple is. But you'll need to be confident about Topgolf's growth and profitability outlook over the long term.