2023-12-13 09:22:47 ET
Summary
- Eventbrite's business has finished its post-COVID recovery in a better spot than it started.
- Management's strategic shift to view itself a two-sided marketplace appears to be paying off in business focus and visibility.
- The company is free cash flow positive, close to GAAP net income profitability, and has a solid balance sheet well-suited for the current interest rate environment.
- For all this, Eventbrite's stock trades closer to Covid and 2022 bear market lows.
- While things can go wrong in Eventbrite's business, the stock's risk-reward is attractive.
The dichotomy between investing in value and investing in growth is a surface-level one. It's better to say that what we're looking for in a stock is a disconnect between what it should be worth and what it's trading for. That could be because it's priced exceptionally cheaply as the market expects profits to drop, a drop that may never come. Or it could be because the market can't anticipate how good things could get for an otherwise fully priced stock. There are many other possibilities, of course. Whatever the case, we need to focus on the disconnect.
One way I frame that is to look for stocks where the company performance is improving but the stock isn't. That might turn up former high-flyers who are 'growing into their multiple', but it can also uncover companies who have lost the credit or attention of the market, even as they improve to the point of meriting that credit.
A stock that fits that bill is Eventbrite (EB). The ticketing and event company is set to attain its 2019 revenue levels at much higher gross margins and with better cash flow dynamics. More importantly, the company has re-focused its strategy in a significant and appropriate way. Its underlying metrics are healthy across its business. Its balance sheet did take a hit over the pandemic period, but the debt was issued in 2020 and 2021 at less than onerous terms.
And, for all that, Eventbrite's market cap and enterprise value are less than 50% of their pre-COVID levels. Whether or not that pre-COVID valuation was inflated, Eventbrite's risk/reward seems quite attractive at current levels.
Brief description of Eventbrite
Eventbrite is a tech company that provides ticketing technology to event planners and hosts, or as Eventbrite calls them, creators. Those creators can host an event on Eventbrite's system and sell tickets to guests. It is essentially a two-sided marketplace model: Eventbrite attracts creators who have an event to promote or sell tickets to, and need to find an audience. It attracts eventgoers who know that they can find things to do on Eventbrite. The more creators attract their built-in audiences to Eventbrite, and the more eventgoers find new events to attend beyond what they were looking for, the better for Eventbrite.
Eventbrite sometimes gets lumped in with ticketing companies - your Live Nation (LYV), SeatGeek (Private), Vivid Seats (SEAT) and so on. It has in the past had more ambition to compete as a ticketing company. I place it closer on the spectrum to a company like Meetup (Private), which is more purely about finding events rather than a ticketing platform. Eventbrite wins when more small and medium sized groups join its platform; it is less likely to horn in on major vendors' businesses.
Eventbrite makes money by taking a cut of ticket sales, which again is a basic marketplace model. It has raised fee levels in the past year and developed new capabilities, which I'll discuss below, with an aim of increasing its take rate and making the platform more useful, not necessarily contradictions in terms.
A shift in Eventbrite's focus
Eventbrite came to market with a strategy that was partly right. Its top strategic objective was to " efficiently attract new creators ." The strength of its platform rests on it being an inevitable destination for people hosting events. But the way they went about focusing on this under the hood was off. It focused on cohort dynamics and retention rates and how it could "add capabilities to better serve specific categories." These are not unimportant, but they seem to misdiagnose the company as a ticketing agency rather than a marketplace. Perhaps that was necessary in Eventbrite's early history to scale, but it wasn't an attractive time to invest.
Things changed in 2022. Of course, there was the pandemic, which was a huge threat to a business based on in-person events. Eventbrite survived thanks to debt until we got to the 2021 reopening. By 2022 the business was not yet back to full health, but on more solid footing. Eventbrite held an investor day that June, in which it unveiled a new focus:
This seems obvious, but was a new step for Eventbrite (take rate, for example, rarely shows up in Eventbrite's filings or shareholder letters before 2022). These five factors are what combine for Eventbrite's revenue, and it makes it easier for the company to focus on what it can do to improve each of those factors.
Getting the shift to work
Eventbrite can only have a minor effect on the creators' business model, the middle three factors in the above image. It can develop tools that might be more attractive to frequent event creators, and it can engage in costly recruiting of certain types of creators, but for the most part, event hosts will decide how big, expensive, and frequent their events will be. Most of Eventbrite's control, then, is in attracting new creators and in increasing its take rate. Those goals are often in tension with one another - raising prices on creators tends to make the business less attractive.
Eventbrite raised fee levels in the beginning of 2023. It put the ticket fee expense on the buyer side while building in a per/event or per/month fee for the creator, as compared to a % of sales + fee/ticket model previously. That's a lever that must be pulled judiciously, but that has certainly had an effect this year.
The company has also developed tools for creators to get more out of the marketplace, namely marketing and advertising tools. The company disclosed at least $3.8M in revenue for advertising services through the first 9 months of 2023, which sounds trivial but is 15 basis points in take rate for 2023.
This is also a recognition that its game is a marketplace one - help creators find the right eventgoers, and eventgoers the right creators and events, and everyone is likely to be happier on the platform, as long as Eventbrite doesn't squeeze too much. Anybody who has shopped on Amazon ( AMZN ) recently will know the risks of too much advertising on a native demand platform. Done wisely, though, platform marketing tools can be a positive for all involved.
How it plays out in the numbers
Take rate as a whole is up to 8.9% this year to date vs. 7.9% last year. Gross ticket value, which reflects the four factors from that growth model before take rate, is up 11.7% so far this year. I can't form-fit these factors into an algebraic equation, but the bottom line is that Eventbrite's revenue is up 26% YTD, and forecasting to come in at 25% for the year.
The most important core stat, though, is that paid creators are up 15.4% this year*. This suggests that Eventbrite has so far, at least, gotten away with the price hike without damaging its broader ecosystem. If Eventbrite can continue to grow its creators pool - and it targets high single digit to low double digit growth, vs. 10.1% in Q3 2023 - everything else will work out, given the company's newer focus on profitability.
*Calculated using just the year over year comparisons for each quarter. I don't know how many of the 172K creators in Q1 repeated in Q2 and so on.
And profitability is, at last, close to following. Gross margins are at 67.8% year to date, vs. a long-term goal of 68-70% and a 2019 gross margin of 60.5%. Operating expenses have grown 18% so far this year, which is still a lot for the company's scale, and it is not profitable on a GAAP basis. But 18% growth is less than 25%.
And while net income profitability is not here yet, EB is about to cross over into free cash flow profitability even after backing out share-based compensation. Its model has an additional working capital advantage, as EB collects ticket fees on creators' behalf and holds them for some time on the balance sheet before disbursing them. This negative working capital dynamic is familiar for anybody who has studied Amazon or major retailers, and has both important cash flow and balance sheet/income statement implications, discussed further below.
Eventbrite restructured at the beginning of the year, including cutting positions and relocating positions to Spain and India. Its estimate is that the cost this year is $20M, with annual savings of $13-14M, some of which will be reinvested. For context, free cash flow - share based compensation (FCF-SBC) is -$22.7M for the last 12 months.
The balance sheet wrinkle
A last point before making the valuation argument: Eventbrite has an especially advantaged balance sheet for the current interest rate environment. Its debt consists of two tranches of convertible bonds, one bearing 5% interest and due in 2025, convertible at $12.6/share; the other bearing .75% interest and due in 2026, convertible at $27.89/share (guess which one was issued in March 2021?). The debt isn't very onerous, and should have the cash to cover it even if their shares don't reach the conversion level (if they do, there will be some dilution, of course).
Against $9.1M in annual interest costs, the company can invest not only its 'own' cash on the balance sheet, but the creator payment float. It generated $4.7M in net interest in Q3. This gets EB that much closer to profitability, at least till rate cuts come into effect.
Valuation
Where this all leaves us is a company that is trading at 2x EV/2024 sales. It has $11M in net debt - you have to subtract accounts payable to creators to get a true net debt/cash level, in my view. It has $31M in free cash flow, meaning it trades at 25x FCF, but that is with share-based compensation included.
In the company's 2022 Investor Day, Eventbrite set an ambition for 20%+ revenue growth and 20%+ adjusted EBITDA margins over the long term. On its latest conference call, CFO Lanny Baker called out "paid ticket volume" as the bigger driver of growth in 2024, i.e. tickets / event and potentially events / creator, which were flat in 2023.
(It appears that fee change has only gone into effect in the Anglophone world , and perhaps not even for all accounts, meaning there's some pricing upside left. I imagine take rates will get close to 10% in 2024).
If Eventbrite can achieve that revenue growth for 2-3 more years, this investment will almost certainly work. Here's a basic model, with operating expenses still growing at double digit rates and heavy dilution:
But even without growth, it's hard to see how bad this could get. The company is positive free cash flow and has enough cash already to cover its debt. We could see dilution from the share-based comp, and a struggle to cross over into true profitability. The benefits of its balance sheet and free cash flow go away without growth. And even then, I think shares should be about what they're worth now, a lost investment.
If the founding partners - Julia Hartz ((CEO)) and Kevin Hartz (Chairman) - don't find a path to growth, Eventbrite may also become an acquisition target. Eventbrite appears to have strong niche leadership and would make sense either for strategic acquirers - Airbnb (ABNB) is a decent hypothetical - or private equity acquirers who can cut costs.
What could go wrong
The two things that worry me beyond Eventbrite scaling to profitability are a) creator growth stalling/going negative, and b) Eventbrite is exposed to discretionary spend.
Creators growth is at 10% year over year in the most recent quarter. If this gets below 5% at any point, it puts a lot of strain on price or intensity as the way to grow. I'm worried that will be tough to do well, and could force more take rate hikes, which hurts creator growth more. If they can keep 8-10% creator growth year over year, everything else is easy. I don't yet have a line into creator communities or leading indicators to see that this might play out, but it is what I will most focus on.
The other side is that events are in the experience/consumer discretionary/entertainment/leisure bucket. I own several travel stocks, and it seems clear that most of the excess 'revenge travel' spend has burned off post-pandemic. In a growing economy, I would expect continued interest in getting out of the house, meeting up with people, and going to events. But whether that persists may depend on macro factors.
An "event" driven play
Eventbrite's transformed understanding of itself from a ticketing agency to a 2-sided events marketplace makes it easier to understand how it might grow revenue and profitability in the future. Its initial progress in completing the Covid recovery and changing its margin profile has been promising. And for all that, the stock has stayed close to both Covid and late 2022 lows.
At this point, that seems like a disconnect to me. Unlike on Eventbrite's platform, those sorts of events are hard to find. I am now attending, and waiting to see whether the crowd of EB shareholders expands.
For further details see:
Eventbrite's Marketplace Focus Creates An Increased Disconnect With The Stock