The Nasdaq Composite has rebounded 31% this year, but there are still good deals to be found if you know where to look.
Toast (TOST -0.50%) and Live Nation Entertainment (LYV +0.39%) have risen 30% and 24%, respectively. Here's what is driving these companies' momentum, and why these stocks could deliver outstanding returns to long-term investors.
NYSE: TOST
Key Data Points
1. Toast
Toast is a leading financial solutions and technology platform for the restaurant industry. It offers a software-as-a-service (SaaS) product that helps restaurants manage orders, delivery, and operations, among other things. The company's strong growth has pushed the stock up 30% year to date, but shares are still 67% from the previous peak.
While restaurant industry sales flattened out over the last year amid rising inflation, Toast is still seeing plenty of demand for its platform. Annual recurring revenue crossed $1 billion for the first time in the most recent quarter, growing 45% year over year. Its high rate of growth indicates a huge opportunity.
Toast recently signed a deal with Marriott International to provide a tailored product for Marriott Select service hotels in the U.S. This is an important step in Toast's growth journey, because it signals that the platform is not just for small restaurants but can be scaled for the most complicated tasks in the restaurant business.
Toast also just launched a new product for catering and events. This represents another expansion of its addressable market, since more than 60% of small and medium-sized restaurants offer catering as part of their business.
Toast is also showing an ability to improve profitability even as it grows its top line. The company reported positive free cash flow in the last quarter. With free cash flow starting to grow along with revenue, the stock could be an absolute steal at a price-to-sales ratio of 3.7, which is unjustifiably low for a high-growth SaaS stock.
NYSE: LYV
Key Data Points
2. Live Nation Entertainment
Another megatrend that investors shouldn't overlook is growing demand for live music. Concerts are now a larger percentage of revenue for music artists. Live Nation Entertainment, which owns the leading ticketing service Ticketmaster, is enjoying tremendous momentum right now, and the stock looks like a bargain.
The shutdown of live events during the pandemic was only a speed bump for Live Nation, which has been delivering above-average growth for many years. Over the last 10 years, revenue grew at an 11% annualized rate, with free cash flow growing nearly 20% per year.
Live Nation serves more than 670 million fans across 48 countries. That huge customer base is built around a growing pool of artists who turn to the company to promote their events. Live Nation is dominating the live market given its vast distribution channels across mobile apps, various branded websites, and relationships with artists. It also generates lucrative revenue streams from advertising and sponsorships.
Revenue grew 27% year over year in the second quarter, driven by a 20% increase in tickets sold this year. That comes to 117 million sold tickets year to date. Wall Street is understandably skeptical that the company can maintain such strong momentum as the pandemic recovery completes its course.
However, management believes the company is set up for "very strong" growth in 2024, based on growth in attendance and improving profitability per fan at the events. The company is seeing tremendous growth in Latin America, up 35% in the second quarter, and management is still working to expand in other markets. All told, Live Nation has a lot of growth left in the tank.
Most importantly, the stock is not pricing in a lot of growth. At a price-to-free cash flow ratio of 13.8, this growth stock is an incredible bargain. With a valuation this inexpensive, the stock could still move higher over the next several years, even if revenue growth were to slow.
