Via https://newsapi.org online business online marketing online business opportunities Company overview
Eventbrite Inc. (EB), headquartered in San Francisco, California, was incorporated in 2003. The company built a technology platform to enable the planning and promotion of events and sell tickets to attendees. In 2018, the company worked with more than 790,000 creators and issued approximately 265 million tickets across approximately 3.8 million events in over 170 countries.
Via https://newsapi.org online business online marketing online business opportunities Summary Investment Thesis
Eventbrite’s stock offers a potential downside of 48-56% from its current price of $20.6. We think the market has given credit to the stock for the company’s historical high growth, high retention rate, and huge market potential. Based on our analysis, several conclusions can be drawn: (1) organic growth had plateaued (2) acquisition growth is not sustainable, (3) valuation is too high using both comparable and DCF analyses, and (4) earning releases are catalysts to triggering further sell-off.
Via https://newsapi.org online business online marketing online business opportunities Organic growth has plateaued
We think the market has mispriced Eventbrite’s organic growth potential. Eventbrite grew its revenue at a rate of 51% and 43% in 2017 and 2018, respectively. The high growth has been fueled by the 2017 acquisition of TicketFly. In the company’s fourth-quarter earnings release, Eventbrite presented a decelerated 10% growth outlook for 2019Q1 and the stock was sold off. It is a clear sign of weak organic growth, but not surprising since the company treats net revenue and paid tickets from an acquired business as its own platform transaction after the one-year anniversary of the acquisition; and, as of end of the fourth quarter of 2019, most of the acquired revenues have now been taken into its calculation base. Further, we believe the weak outlook is the result of a defective business model and Eventbrite’s mediocre competitive advantage. Our rationale is as follows:
Via https://newsapi.org online business online marketing online business opportunities The competitive landscape in the ticketing service market
Ticketing service is a part of event management and includes budgeting, scheduling, site selection, acquiring necessary permits, coordinating transportation and parking, arranging for speakers and/or entertainers, selecting decor, handling event security, catering, ticketing, coordinating with third-party vendors and making emergency plans.
Source: LEL investment research
Event planners organize, promote and execute events. An event planner can be an individual, a boutique firm or a corporation undertaking all or part of the services in the cycle.
We compared the three most well-known ticketing service platforms: Live Nation (LYV), StubHub, and Eventbrite.
Eventbrite helps clients market events and sell tickets through its online platform. Live Nation owns venues and operates omnichannel platforms, offering concerts, sponsorship and ticketing services (Ticketmaster). StubHub is an online ticket marketplace company owned byeBay(EBAY). Both Live Nation and StubHub serve the professional performer market, while Eventbrite serves the mid-market.
Source: Company reports
Via https://newsapi.org online business online marketing online business opportunities Eventbrite has limited opportunity to break into the professional performer market
We analyzed data comparing the operating metrics (seen in the chart below) in light of the various business descriptions. Although Ticketmaster, the ticketing arm of Live Nation, has a higher cost per ticket due to its brick and mortar model, it has a higher revenue per ticket at $7.03 than Eventbrite at $3, since the average ticket prices for the professional market are higher. In addition, Live Nation, by organizing its own events, has the ability to set ticket price or seating configurations to ensure profitability, while Eventbrite does not set ticket prices for events, as this information is determined by the clients.
Overall, Live Nation is profitable while Eventbrite suffers a loss on a per ticket basis.
Source: Company reports
In analyzing the financials of Live Nation and Eventbrite, we noticed the following:
Live Nation is more profitable and generates a stronger cash flow than Eventbrite from either the aggregate or ticketing segment point of view. Live Nation generates most of its profit and cash flow from sponsor businesses.
Source: Company reports
To effectively compete in the professional performer market, a company needs to have its own value proposition. Large players, such as LiveNation, control exclusive ticketing rights by rendering the advantage of venue ownership and taking risks of losing money in organizing events. StubHub, through its resale marketplace platform, provides a unique proposition to attract attendees for event promoters and creators in competition with Ticketmaster.
Eventbrite’s ticketing only platform provides little value-adds for large creators. Hence, we conclude that Eventbrite should have a limited opportunity to break into the professional performer market at the moment.
Via https://newsapi.org online business online marketing online business opportunities Eventbrite faces strong competition in the mid-market due to higher costs than peers
Live Nation has been able to increase its revenue per ticket price over the past 3 years, while Eventbrite seems to have had difficulty raising the number to above $3. We believe the reason is the severe competition from the mid-market ticketing platforms.
Eventbrite operates an app for the purpose of acquiring event attendees. However, most people learn about an event through the news, blogs, and social and music platforms. Eventbrite’s app is not an effective tool to attract attendees. Owning an app just does not give the company an advantage in the mid-market competition, and it is, in fact, a cost disadvantage. Competitors are charging lower rates than Eventbrite because most of them, such as Ticketleap and BrownPaper, operate apps merely as the function of check-in without the additional cost of a traffic acquisition platform.
Source: Company’s website
Via https://newsapi.org online business online marketing online business opportunities Ticketing platforms, in general, have weak bargaining power with creators
A clear sign of weakness is that Eventbrite pays upfront signing fees and advances to certain creators when entering into exclusive ticketing or services agreements. We find that Ticketmaster has similar practices and conclude that ticketing platforms generally have weak bargaining power against creators. As a result, we see that the ability of Eventbrite to increase revenue per ticket is limited.
Via https://newsapi.org online business online marketing online business opportunities Other market potential is in doubt
Eventbrite believes that its platform can address certain additional potential market opportunities, including tours and attractions, movie theatres, performing arts and spectator sports. However, because most of the markets are dominated by existing online pure-play players–for example, TripAdvisor in the tours sector and Fandango in the theater sector–the company should face severe competition in breaking into these coveted markets. In certain markets such as sports, Eventbrite, as a capital-light model, will have to spend a tremendous amount of money and time to build and operate venues just to catch up.
Via https://newsapi.org online business online marketing online business opportunities Payment processing market is highly competitive
According toEventbrite’s founder Julia Hartz in an interview with Forbes, she founded Eventbrite with the inspiration of PayPal (PYPL). She was an early investor in PayPal and would like to leverage their technology to disrupt the ticketing sector. However, there are already many payment players out there such as Apple Pay and many banks and financial institutions. Many either provide additional value-added services or function as a convenient payment tool for customers. (Apple Pay provides a seamless one-click convenience function for customers; PayPal offers a P2P transferring service through Venmo; banks offers deposits and credit services.) Eventbrite does not have an edge in competing with these players if enter the ticketing processing.
Via https://newsapi.org online business online marketing online business opportunities Acquisition growth is not sustainable
The high growth has been fueled by its 2017 acquisitions, TicketFly and TicketScript. The company treats net revenue and paid tickets from an acquired business as its own platform transaction after the one-year anniversary of the acquisition, not surprising since most of the revenues acquired are now taken into its calculation base.
The company has demonstrated an improved EBITDA margin after acquisitions but has neglected the fact that its operating and free cash flow margins have been significantly weakened given their high amortization and stock-based compensation expense. After acquiring TicketFly, Eventbrite increased its promoting and marketing capability, but this still does not create a unique value proposition for creators. We think the company’s acquisition activities, to a certain degree, are certainly part of its historically high growth and high retention rate, but they are not everything.
In addition, the continued acquisition of small size ticketing platforms implies that the barrier of entry to the ticketing universe is not high. The low barrier of entry should render the company unable to increase its service fee.
Via https://newsapi.org online business online marketing online business opportunities Upside/downside analysis
We see the stock as a short opportunity of at least a 48%~56% return with limited risk. We employed both a valuation multiple analysis and the Discounted Cash Flow method.
Results of our multiple analysis:
We include Live Nation and transaction-based eCommerce platform Expedia in the peer group. Eventbrite showed a much lower revenue growth outlook of 10% in 2019Q1. It is very hard to justify the 5.22 P/S ratio at which the company is currently trading. Considering the nature of the business(Ticketing is part of Live Nation’s business) and the growth prospect, we use an adjusted 3.5x multiplier and reached a share of $10.6 or a 48% return for a short seller.
Source: Yahoo Finance, company’s report
*We choose Expedia instead of Booking Holdings because the merchant model is a closer comparison.
Assumptions of a DCF analysis:
Revenue: We do not believe the company can break into the stadium level professional market, but we still conservatively assume that it can grow at 20% over the next 3 years with a terminal growth rate of 5% in the mid-market.
Gross margin: A slightly improved but the limited upside is expected, given the unattractive middle market economics and ticketing stand-alone platform business model, as well as the severe competition from other ticketing platforms.
R&D expense as a percentage of revenue: We see it as flat, given that the company decided to increase R&D spending due to the addition of its Madrid and Vancouver creative hubs in 2018.
Marketing expense as a percentage of revenue: This should continue to improve, given the strength of its high retention rate and self-signups.
General administrative expenses as a percentage of revenue: This will gradually improve, given the company’s fixed leverage, but it will be partially offset by high amortization and stock compensation expense due to acquisitions.
Eventbrite currently has a -5.4% free cash flow margin. Using the above assumptions, we expect its cash flow margin to improve to 12%, the high point in the company’s history.
Using a DCF calculation, we arrived at $9.01 per share, implying a 56% return for the short seller.
Further, we applied a sensitivity test to different assumptions on terminal growth rate, weighted average cost of capital (WACC) and free cash flow margins, concluding that this is a safe short at the current price.
The sensitivity test of WACC and terminal growth rate assumes a cash flow margin of 12%. We see stock downside range from -78% to -26% if WACC varies from 7% to 13% and terminal growth rate is capped at 5%, which is already an aggressive assumption. The short seller seems to be well-protected in most scenarios.
*The stock upside of over 100% is the mathematical result of a close WACC and terminal growth rate number. Theoretically, it should not happen, since if the market gives a high terminal growth rate assumption, the beta of the stock is usually high, and thus a high WACC should be used in the calculation.
The sensitivity test of WACC and free cash flow margin assumes a terminal growth rate of 5%. We see the stock downside range from -96% to -25% if WACC varies from 7% to 13% and the free cash flow margin is capped at 8%. The short seller seems to be well-protected in most scenarios.
The sensitivity test of the free cash flow margin and terminal growth rate assumes a WACC of 10%. We see the stock downside range from -88% to -30% if the terminal growth rate varies from 3% to 7% and the free cash flow margin is capped at 12%. The short seller seems to be well-protected in most scenarios.
In sum, both the multiple and free cash flow analyses suggest a huge downside for the stock with very limited risk.
Via https://newsapi.org online business online marketing online business opportunities Catalysts
We think the earnings release on Mar 7, 2019, acting as a trigger for the sell-off, as the market realized Eventbrite’s growth potential is likely plateauing, given the weak outlook. We believe the forthcoming earnings releases in April from Live Nation and eBay (which owns StubHub) could act as catalysts for the stock, as both companies are likely to have a higher absolute or percentage growth than Eventbrite in Q1 2019. The market will likely reevaluate the stock once the data is out.
Via https://newsapi.org online business online marketing online business opportunities Risk
The risk is capped sufficiently by the potential of Eventbrite’s current business model, which we don’t see changing. In fact, the company has limited chances to make dramatic improvements in the competitive landscape short-term, or through acquisitions.
In addition, we also see that the likelihood of Eventbrite being acquired is very small, given its higher cost position among the mid-market online pure-play ticketing platforms. Hence, we are comfortable in concluding that this will be a great short opportunity in the next 6-12 months.
Via https://newsapi.org online business online marketing online business opportunitiesConclusion
Eventbrite currently has a cost per ticket of $3.39 and only earns $3 per ticket, thus operates at a loss. Past organic growth and acquisition growth seem to have been limited help in improving profitability. We think the competitive pressures from the mid-market players limits its ability to increase revenue on per ticket basis; plus the lack of a unique proposition to users has also restrained its ability to enter other markets. Overall, the barrier of entry to ticketing is low. Future competition risk from dominating payment players is high. We don’t see a bright outlook for Eventbrite. The valuation appears to be high compared to its peers. Its losses could become a bigger problem long term if the company fails to cut variable costs under the $3 level. We suggest the reader short the stock at the current price.
Disclosure:I am/we are short EB.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.