CTS Eventim (EVD:GR) is an over-earning ticket seller in Europe that is about to face multiple growth cliffs while still being valued as a secular compounder at 28x consensus EPS-2024. We see an opportunity to short the stock as it tops out on post-Covid euphoria, which is temporarily masking several negative changes in the business structure: domestic market saturation for online ticketing, challenging competitive dynamics abroad, and excessive monetization of services presenting longer-term disruption and/or regulatory risk.

We believe that ticketing growth declining from mid-teens to MSDs and a higher share of low-quality promoter and venue businesses in the company’s earnings warrant a much lower valuation multiple. From the current share price, we estimate ~40% downside (or lower in case of a severe macro recession and/or in case of a new regulatory cap on fees and/or technological disruption) and only a moderate 10-15% upside in the next 12 months in case we’re wrong on both the ticketing slowdown and the business quality deterioration.

The business has been a compounder – growing its top line and share price by 16-17% annually – since the early 2000s, and almost 40% of the stock is still owned by the founder, Klaus-Peter Schulenberg. However, the previous sources of growth are all but exhausted and Schulenberg sold a quarter of his stake in 2017-2019 when ticketing growth started to cool down. Below we detail where we disagree with the current longs both on underlying live events market trends for 2024-2025 and CTS Eventim’s business growth prospects in the medium/long-term.

1)      Ticketing boom is a temporary squeeze – 15% above the long-term equilibrium

The live events market is driven by both supply (number and caliber of artists touring) and demand (ticket prices and number of seats sold). The 2022-2023 period was unique in the industry as red-hot pent-up demand heated up by excess savings during COVID-19 was met by a record-high supply of artists back on tour after the pandemic. As a result, global gross concert sales in 2023 exceeded 2019 by ~50% or 10% CAGR during the 4-year period, above the 5-6% normal industry growth trend. Normalizing 2023 back to the trendline would imply a ~15% downside that we see playing out in the next year or two.

Further, the market is naturally prone to halo effects of popular artists and, as a result, is heavily skewed towards star performers, with top-10 tours grossing 10-15% of all concert sales and top-100 grossing almost a third.  Although not a perfect indicator, we have discovered that analyzing data for the top 10 artists serves as a valuable means to verify both abnormal supply shocks and the extent of demand overshoot:

·         Taylor Swift's record gross of over $1b+ in 2023 is more than double the previous high set by Ed Sheeran in 2018.

·         Average gross per show for the top-10 tours was $1.75m in 2019, quadrupling to $7.3m in 2023. Top-10 tours combined number of shows in 2019 was 907 vs only 522 in 2023. As a result, the share of top-10 tours in global gross grew from 8% in 2019 to 13% in 2023.

·         Most popular artists performed a record number of shows in 2023-2024, uniquely in sync. All of the most popular 10 artists in 2023 (according to Spotify Wrapped) had their tours kicking off in late 2022-2023, with most continuing in 2024. The same applies to 7 out of the 10 most streamed artists ever (all-time ranking based on Spotify data) – for comparison, only 3 of them toured in 2019.

·         Touring is naturally cyclical as it relies on the artists’ creativity, performance, and travel efforts (for example, Ed Sheeran has only done 5 tours since 2011, and Coldplay has gone on the road only 7 times since 2000) and is additionally costly and risky in production if promoters miscalculate future demand.

In all, we expect late 2024 and 2025 to face a slump in supply as many popular artists work on new albums and take a touring break. From the demand perspective, while it’s difficult to time the turn in consumer sentiment, one may look at the recent example of the Coachella festival (one of the largest globally) in 2024, with revenues dropping in the mid-teens from 2023 (and Coachella had relatively moderate ticket price increase of 16% since 2019). Therefore, we expect 2024 to be the first sluggish year in the US (with Live Nation already flagging low growth for Ticketmaster) and similar dynamics in Europe in 2025 vs consensus expecting mid-teens growth over 2024.

Lastly, on Europe vs. US dynamics, the previous write-up on VIC by CaptainAyub highlighted why CTS Eventim had been a good play on Europe lagging the US in terms of a resurgence in music tours post the pandemic. However, we now see the 2024 ticketing peak in Europe already reported in the past results. Eventim books revenue at the moment of sale to consumer, not the event itself; for example, Taylor Swift’s European leg of Eras Tour in May-August is already reflected in the company’s historical financials, and the remaining slew of booking activity in 2024 (including for early 2025 events) reflected in the guide/consensus expectations for FY24.

2)      Domestic market saturation in Europe for CTS Eventim; the online shift is over

Historically, the company managed to establish its hold over German ticketing distribution through its major share of promoters (owned directly or controlled indirectly via exclusive long-term agreements), controlling supply on one side of the network, and establishing relationships with over 200,000 local ticket outlets (i.e., brick and mortar box offices) using Eventim selling software on the other side. The company has scooped up promoters (who pick ticketing counterparties in Germany), and local distributors received access to the widest array of events to sell through Eventim, while artists received the widest distribution through Eventim. As a result, the company quickly grew to dominate 80-90% of the market in Germany.

Further, since the mid-2000s, the company has implemented a shift to online from 10% to ~95% of tickets sold now directly to consumers through Eventim’s web portals. This shift has been associated with higher selling fees and lower costs as the company chose to exercise its pricing power and cut out the middlemen (local box office operators), respectively.

Lastly, the company has been implementing the same playbook supplemented by M&A outside Germany and reached similar dominant positions in Austria, Italy, Switzerland, and recently France with the acquisitions of France Billet.

In total, CTS Eventim roughly tripled its ticketing revenue or grew 13% annually on average in the 10 years preceding 2019 (to exclude the post-pandemic squeeze described earlier). We estimate that Germany accounted for ~9% of that growth, with the shift to online accounting for most of the pricing uplift. In the past 5 years, 2019-2024, total ticketing growth has accelerated to 13% CAGR, which we see as not only unsustainable vs historical average but also declining now to industry growth levels of 5-6% (post normalization of the ticketing boom) now that international expansion and online shift are mostly over.

As of late, the company has been vocal about its expansion in the US and mobile ticketing as its new growth levers. However, we consider the US market much more challenging than Germany in terms of competition (discussed below). At the same time, mobile ticketing potentially presents a platform shift risk, with Eventim disadvantaged against Spotify or other mobile-first streaming platforms (further below). Instead, we believe the company will pursue the more capital-intensive and margin-dilutive path of acquiring control over more venues and promoters while also venturing outside of its core European region and taking EM risks in Asia and LatAm. The latter are both still minor markets for music concerts as compared to the US and Europe, and there CTS Evenitm also faces competition from a larger global competitor, Live Nation.

3)      Competitive dynamics stacked against CTS Eventim domestically and abroad

The ticketing landscape in Germany differs from the US in two key matters.

First, the ticketing service is picked by the promoter or event organizer in Germany, but it’s picked by the venue in the US. As Live Nation controls (directly or indirectly through their industry dominance and associated network effects) the most important venues in the US with multi-year exclusive contracts for ticketmaster, CTS Eventim, as a distant challenger from abroad, is relegated to only local scale secondary and tertiary events, and arenas.

Second, in Germany, regulators prohibited exclusive contracts with promoters mandating at least 20% of the tickets to be sold outside of Eventim. This implies that Live Nation / ticketmaster has a much better shot at challenging CTS Eventim on their own turf.

Further, CTS Eventim has historically underinvested in its technological capabilities. Its gross margin in ticketing has been stagnant at the 60% level since 2012 despite regular service fee hikes and general ticketing price increases as all the gains were eaten away by labor cost inflation for promoter services and call centers. For example, according to company formers, CTS Eventim is still largely manually creating the event seat maps and entering the information from Excel spreadsheets sent by promoters. In terms of R&D investments, we estimate that the company spends roughly 10x less than ticketmaster.

Therefore, a very shallow technological moat and lack of deep consumer engagement and personalization opens up opportunities for competition, especially as consumers are shifting to mobile, where Eventim is a laggard. One example of an emerging competitor would be Spotify, which effectively controls the music discovery funnel, owning and parsing vastly more data on actively engaged users than CTS Eventim. Spotify already has established relationships with the artists (even if indirectly, through labels) and has been actively looking for ways to monetize its demand aggregator position through marketplace-type offerings to the content creators – ticketing would be another lucrative and high-margin revenue stream. Spotify already offers curated suggestions to live events currently presented as links to ticketing portals such as ticketmaster and/or Eventim. While details of the agreements between ticketing portals and Spotify are undisclosed, we suspect Spotify is currently charging a modest take rate for its leads but may potentially venture into ticketing on its own or increase its take rate according to the incremental demand it brings. Not only does that imply worse economics for Eventim in mobile, but the way Spotify presents multiple links at once also erodes Eventim’s moat in Germany as the default ticketing solution.

4)      Excessive monetization / regulatory risks

CTS Eventim earns ~45% EBITDA margins on its ticketing business as compared to only ~35% by Live Nation. Eventim’s advantage is partly explained by its leaner expense base (e.g., lower investments in R&D as highlighted above), but to some extent, it’s also attributed to excessive monetization. Examples of bogus fees historically charged by the company include print@home fees and urgent shipping fees for the service that failed to expedite delivery – both were investigated and banned by the German regulator. Currently, despite the proliferation of online ticketing, CTS Eventim still charges hefty shipping fees for token paper tickets that remain popular among Germans as souvenirs.

5)      Diluting business quality by increasing venue ownership

For the reasons noted above, the company has been actively increasing its vertical integration to keep its dominant hold and fuel further ticketing growth. While a sound strategic decision, we highlight that the revenue share of high-margin, predictable, and no-capex ticketing business fell from an average of 41% in 2009-2019 to below 30% in 2022-2023. Consequently, consolidated capex spiked from ~15% of EBITDA on average in 2009-2019 to 34% in 2023 as the company invested in its fourth large-owned venue, Arena For Milan. The company guided that 2024 will see a lower level of investments, but we are doubtful Arena For Milan will be the only new venue constructed in the next 5-10 years.

We also point out that promoter and venue operation businesses are inherently more sensitive to sell-through ratios (how many available seats are sold) due to the high share of fixed operating expenses and required upfront investments ahead of the event.

Financial estimates and valuation

We value the stock on 2025 earnings to normalize for the live events market cooldown and the impact of the recently acquired France Billet contribution not fully reflected in 2024. The company guides to EBITDA, which also serves as the focal point for consensus attention. Thus, we'll delve into this imperfect metric (for example, not reflecting capital intensity in venue operating business) further below.

We’re only slightly below consensus/guidance numbers for 2024. On our numbers, ticketing revenue in 2025 should decline by around 8% y/y to fall back in line with the pre-COVID trend. We also normalize live entertainment EBITDA margins to be close to their long-term historical average of 7% from the currently expected 8% in 2024. As a result, our EBITDA-2025 is 12% below consensus.

Given markedly worse growth prospects and the declining quality of the business, as well as the increased risk-free rate since 2019, we believe the stock deserves to be trading below its 2010s historical average of ~12x fwd EV/EBITDA. After the recent share price run, CTS Eventim has closed its pre-COVID 15-20% discount to Live Nation, which we consider fair as the US-domiciled champion is better positioned domestically (discussed above), has greater scale and venue operating acumen for international expansion, is more tech-advanced, and has further potential for margin expansion.  Applying 9-10x EV/EBITDA to our 2025 estimates for CTS Eventim implies €50-55/share target (21-23x P/E-2025 on our numbers) or 33-39% downside to spot.

Conversely, we see a very limited upside of 10-15% to the current share price, coming mostly from a modest guidance beat and accruing dividend.