EB - Eventbrite: Business Strategic Initiatives Show Encouraging Signs Of Growth

2023-06-29 11:54:57 ET

Summary

• Eventbrite's recent performance and strategic initiatives show encouraging signs of growth, with revenue from Boost and Ads tripling YoY in 1Q23.
• The company's expansion into adjacent verticals and product innovations, such as Boost and Ads, offer potential for further growth and increased profitability.
• Despite risks from competition and economic changes, management's confident FY23 guidance and steady demand for live events provide a positive outlook for Eventbrite.

Summary

Eventbrite ( EB ) is a one-stop solution for: (1) Creators to manage events, ticketing and marketing (2) End-consumers to discover events and purchase tickets. Generally serving small to mid-size events. Revenue and profits are mostly from fees earned through paid tickets. I reiterate my buy rating for EB stock as valuation continues to stay attractive at 2x forward revenue, performance so far has been encouraging for future growth trajectory, and a reiterated FY23 guidance that de-risks consensus estimates.

Recent performance is encouraging

My optimistic outlook on the recovery is strengthened by EB's strong execution of a wide range of strategic initiatives. For instance, the company's revenue from Boost and Ads tripled year over year in 1Q23 to an annualized run rate of $8 million; the number of people who purchased paid tickets increased by 28% to 11 million; the company's total revenue increased by 39%; and the company's EBITDA margin increased from 1% to 13% in 1Q23 excluding special items. I like the Boost and Ads strategy because it provides a strong value proposition to event creators that want to reach a wider audience, and it comes with very high incremental margin for EB. This is akin to being able to advertise your “product” on ecommerce sites.

Growth ahead

Overall, I continue to salute management ability to turn the ship around with increasing signs of growth momentum, supported by product innovations and expansion to adjacent verticals. I believe the mid-term and longer growth prospect will rely on how successful EB is at penetrating adjacent verticals that are very lucrative. To put this in perspective, the backbone of EB's ticketing platform—ticketing technology—currently costs a small portion of the face value of a ticket, leaving substantial room for EB to capture opportunities in the remaining 90%. Eventbrite Boost and Ads, which are offered to creators who already trust EB with ticketing, are EB's way of pursuing this opportunity, with the transition to the marketplace expected to contribute down the line. As EB pointed out, event organizers for both free and paid events are more willing to spend money on advertising products than those for premium events because the profit margin for selling an additional ticket is so high for both types of events. Management stated at JPM said at the global TMC conference that with Boost's help, creators can increase their ROI from social media advertising from 40% to 60% for just $50 per month. Given the price, and the increase in ROI, I believe the cost to value proposition is very compelling.

The bear narrative is that EB lacks the expertise to compete with incumbents in these verticals, but I would argue that EB's position in the value chain is critical - the technical expertise of building the ticketing system is much more difficult, and critical for the event to succeed. As a result, while EB lacks the expertise, it is something to which they can R&D or acquire another solution provider. It can use this in conjunction with its existing ticketing technology (which is critical) to gain market share.

Guidance

Given the management's apparent certainty in their guidance, consensus FY23 estimates appear to be highly probable at this point. They also highlighted the ever-steady demand for real-life entertainment. Assuming this to be the case, EB's revenue would see an acceleration in 2H23, from the $76 million to $79 million guided for the second quarter to the $317 million to $330 million guided for the full year. Even better, a greater impact from marketing and consumer product initiatives, greater benefit from ticket fee changes, and robust growth in Eventbrite Ads were cited as reasons for optimism by management that results could approach the high end of the guide. However, I will not back down from my cautionary approach that the economy remains highly unstable and could easily enter a deep recession if the Fed becomes more hawkish. Lower than expected results may be the result of factors such as a weakening economy and increased customer churn in response to product and pricing changes.

Margin

As the company reaps the rewards of revenue growth with strong incremental unit economics and the savings from relocating labor to lower cost locations, I anticipate an upward trend in EB margin. Boost and Ads are also highly gross margin accretive, with gross margins 20pts higher than ticketing, so they should have a positive effect on margins as well. The impact of these, however, will be felt gradually over the coming years because their contribution is currently so small—only low single digits% of total revenue.

Valuation

EB valuation remains appealing at 2x forward revenue, which is still lower than its average of 3.6x revenue. With my increased confident in EB growth outlook, I believe the business should eventually re-rate back to its historical average. The catalyst to drive this re-rate would be EB continuing its 20+% topline growth (which are consensus figures), and EBITDA margins expansion. As EB prints these numbers, I believe the market will recognize that the current EB is not the same as in the past, and will react more positively to the reported results. As such, I believe these will be catalysts that will support a valuation re-rating back to 3.6x.

Risks

Despite the fact that Eventbrite's rivals are not yet as formidable as they are now, I believe the company will be harmed if any new entrants or existing players gain significant traction in the near future. Since Eventbrite has historically placed a premium on organic search engine rankings ((SEO)), any decline in those rankings would likely lead to a rise in the cost of traffic required to maintain the same level of growth.

Conclusion

EB appears to be on a positive growth trajectory, supported by strong execution of strategic initiatives and encouraging recent performance. The company's diversified revenue streams, such as Boost and Ads, demonstrate potential for further growth and increased profitability. While there are risks associated with competition and potential changes in the economic landscape, management's confident guidance for FY23 and the steady demand for live events provide a favorable outlook.

For further details see: