Growth stocks can be fantastic investments if you buy at the right price and hold on for multiple years. Just take a look at the long-term returns of Amazon, Netflix, MercadoLibre, and plenty of other stocks as evidence of what durable growth can do to your portfolio returns.
Plenty of investors target popular technology stocks for their growth investments, but there are durable growing companies across all sectors like consumer goods, financials, and even energy.
Topgolf Callaway Brands (MODG -2.52%) could be the next great growth stock that few investors are talking about today. But is the stock a buy at current prices?
A merger with true synergies
Topgolf Callaway was formed when -- as you might have guessed -- Callaway merged with Topgolf. Topgolf is a golf entertainment company that operates huge driving ranges for groups and parties. It also develops mobile golf video games and sells its top tracer ball tracking technology to professional leagues and third-party driving ranges. Callaway sells its namesake golf equipment along with Odyssey putters, Ogio bags, Jack Wolfskin apparel, and TravisMathew apparel.
The merger for Callaway, which was already a public company, makes sense given the unit economics of Topgolf's business. But it should also benefit its equipment and apparel lines. In 2019, 23 million people visited a Topgolf location, and that was when it had just over 50 locations around the world. With the pandemic closures in the rearview mirror and Topgolf closing in on 100 locations, visitors should get close to 40 million to 50 million a year this decade.
These visits are perfect opportunities for the company to cross-sell its golf equipment and apparel to consumers, especially if they just took up the game as a new hobby.
Topgolf: Unit growth and margin expansion
The Callaway portion of the business is durable, but the majority of growth will come from opening up new Topgolf locations every year. Topgolf had 81 locations opened up at the end of 2022 and plans to open up 11 venues a year around the world (but mostly in the United States) for the foreseeable future.
Once opened, these venues continue to exhibit strong same-venue sales, which is Topgolf's internal metric for valuing revenue growth from existing locations. Same-venue sales were up 11% last quarter compared to the same period in 2019. At maturity, management estimates that a Topgolf venue generates $17.5 million in annual sales, on average.
At 200 locations -- a number that is achievable by the end of this decade -- Topgolf venues could be generating $3.44 billion a year in revenue. That is only slightly less than what the entire Topgolf Callaway entity generated in revenue over the last 12 months. Add on equipment, apparel, mobile game, and software sales and it is likely that this business will be doing much more in revenue in 2030 than it is today.
MODG Revenue (TTM) data by YCharts
Is the stock a buy at today's prices?
Topgolf venues do tons of sales volume, but they are also highly profitable. Adding on maintenance capital expenditures, management estimates that each location does $3.4 million in annual free cash flow, which equates to $680 million in annual free cash flow at 200 locations.
This cash flow is not showing up on the company's consolidated results yet as it is still spending a ton of money to open new locations, but that should start to change eventually. Consolidated free cash flow will be an important metric for investors to track for evaluating the health of Topgolf Callaway's business over the next couple of years.
At a market capitalization of $4.2 billion, the stock trades at a forward price-to-free cash flow ratio of just 6 based on the future earnings potential of the Topgolf business. Add on the equipment and apparel business units, which did $300 million in earnings through the first nine months of this year, and Topgolf Callaway stock looks like a bargain for investors who plan to buy and hold for the long haul.
