Vivid Seats’ Recent Acquisitions Could Boost Growth (NASDAQ:SEAT)

Vivid Seats (NASDAQ:SEAT) operates as a marketplace for event tickets. The company has recently had two acquisitions, with the recently announced Vegas.com acquisition being the significantly larger one. Vivid Seats didn’t disclose Vegas.com’s financial profile very well, but the company did guide for 2024 revenues giving investors some information about the financial future with the addition. The stock seems to be priced for a reasonable amount of growth and operating leverage.

The Company & Stock

Vivid Seats operates an event ticket marketplace. The company’s marketplace works as a middleman for sports events, concerts, theater plays, and comedy shows in the United States. Vivid Seats’ website and app provide marketing and a good UI with buyer protection, bringing value to customers when compared to one-on-one transactions.

Vivid Seats chose an intriguing time to become a publicly traded company – the company merged with a SPAC in late 2021 during a challenging Covid-related ticket market. Since the merger, Vivid Seat’s stock has lost around a fifth of its value despite a strong financial performance:

Acquisitions of Vegas.com and Wavedash

On the 7^th of November, Vivid Seats announced the company’s plans to acquire Vegas.com for a consideration of approximately $240 million with a mix of cash and equity financing. Vegas.com operates the self-named website that markets events and operates a ticker marketplace in the lucrative Las Vegas market. The acquired company’s financials weren’t disclosed in the announcement or Vivid Seats’ Q3 presentation, though – investors are left wondering about the financial aspects of the acquisition. From what I could gather, the company seems to have generated revenues of $24.1 million and a thin EBITDA of $0.05 million in 2015. I believe that the company’s earnings has grown significantly from the year, though, as Vivid Seats communicated in the company’s Q3 presentation that Vegas.com has healthy EBITDA margins and an accretive multiple in the acquisition.

Previously, Vivid Seats also acquired Wavedash in August, an online ticket marketplace in Japan. The acquisition was done for significantly less than the Vegas.com acquisition with a cash expense of $56 million in Q3 related to the acquisition that finalized in September. In FY2023, Wavedash achieved revenues of $35 million, with EBITDA margins that Vivid Seats’ management commented as accretive. Vivid Seats’ strategy seems to involve growing the company’s geographical footprint through acquisitions, leveraging the company’s quite strong balance sheet.

Financials

Vivid Seats’ financials have been turbulent as the Covid pandemic disrupted the company’s operations significantly. Almost impressively, the company’s revenues were negative in the first quarters after the pandemic began:

After the pandemic started to subside, Vivid Seats has achieved a good amount of growth. Currently, trailing revenues stand at $680 million, up 44.9% from the achieved 2019 revenues. The company is guiding for revenues of $810 million to $840 million for 2024 as a result of the recent acquisitions and a good organic performance – the revenue guidance’s middle point represents a growth of 18.7% from the middle point guidance for 2023.

After the pandemic’s negative effect on Vivid Seats started to subside, the company has been able to achieve low double-digit EBIT margins. From Q1/2021 to Q3/2023, Vivid Seats’ average EBIT margin has been 12.0%:

Vivid Seats has a very good gross margin at a trailing figure of 75.1% – I believe that as Vivid Seats manages to grow revenues, the company should be able to achieve a high amount of operating leverage. The company is guiding for an adjusted EBITDA margin of 24.1% for 2024 with guidance middle points, compared to a 2023 figure of 20.0%. Although the acquisitions partly cloud the organic margin performance, I believe that this trajectory could continue well into the future with Vivid Seats’ business model.

Valuation

To estimate a rough fair value for the stock and to contextualize the current valuation, I constructed a discounted cash flow model in my usual manner. The model only accounts for already-announced acquisitions of Vegas.com and Wavedash, and doesn’t factor in further acquisitions.

For Vivid Seats’ revenues in 2023 and 2024, I believe the management’s guidance represents a good baseline – I estimate the middle point of the years’ guidances, representing growth rates of 15.8% and 18.7% in the years respectively. As the 2024 growth is partly achieved due to inorganic efforts, the rate shouldn’t be extrapolated too highly into the long-term future – for 2025, I estimate a growth of 8%. In sequential years, the growth comes down in steps into an eventual perpetual growth rate of 2.5%. The estimated revenues represent a CAGR of 8.6% from 2022 to 2032.

As explained before, I believe that Vivid Seats can achieve a good amount of operating leverage through the estimated growth. For 2023, I estimate an EBIT margin of 14.0%, slightly above the achieved 2022 level. After the year, I estimate a good amount of operating leverage to happen – in the years from 2024 to 2030, the estimated EBIT margin increases into an eventually achieved level of 20.0%. The achieved level could be even higher than I estimate, but for the time being, I see the estimate as reasonable. Vivid Seats has a mostly good cash flow conversion as the company’s capex needs seem to be quite limited.

The mentioned estimates along with a cost of capital of 10.14% craft the following DCF model with a fair value estimate of $8.68, around 13% above the stock price at the time of writing:

The used weighed average cost of capital is derived from a capital asset pricing model:

Vivid Seats leverages debt quite well to its advantage in financing. In Q3, the company had $2.5 million in interest expenses, making the company’s annualized interest rate a low figure of 3.77% with Vivid Seats’ current amount of interest-bearing debt. Vivid Seats uses a good amount of debt – I estimate a long-term debt-to-equity ratio of 15% for the company.

On the cost of equity side, I use the United States’ 10-year bond yield of 4.43% as the risk-free rate. The equity risk premium of 5.91% is Professor Aswath Damodaran’s latest estimate for the United States, made in July. Yahoo Finance estimates Vivid Seats’ beta at a figure of 1.10. Finally, I add a liquidity premium of 0.5% into the cost of equity, crafting the figure at 11.43% and the WACC at 10.14%.

Takeaway

At the current price, Vivid Seats seems to be slightly undervalued if my financial assumptions prove to be near correct. The company’s revenues should grow at a good pace organically in addition to the recent acquisitions, making operating leverage highly likely to happen in my opinion. If Vivid Seats manages to grow above my estimates, the stock price could rise very significantly, but for the time being, I see my estimates as a good baseline scenario. As my DCF model’s upside is quite insignificant, I have a hold rating for SEAT stock for the time being.