Description

Eventbrite Inc (NYSE:EB) Long Thesis:

Thesis:

·         EB completely transformed their business and margin profile during COVID and is at the cusp of demand inflection as the reopening progresses this year.

·         Undervalued on a relative and absolute basis, with the ability to beat estimates while generating meaningful cash flow over the near term.

·         Marketing products introduction mirrors ETSY with the ability to dramatically expand take rate over the next several years.

Business Summary:

Eventbrite is an online self-service ticketing platform for event creators, primarily focused on small to mid-market sized events. Historically, the company had two primary distribution channels for their service, self-sign on and sales. The self-sign on product allows anyone to quickly create an event through Eventbrite’s website and software, either free or paid, and distribute tickets to attendees with EB managing payments and ticket tracking as well as online promotion and other issues. The other channel, that has since been de-emphasized, was a full-service sales channel where EB sales reps would go out and sign-up larger venues to use the company’s services.

The sales channel had lower margins (50s% vs 70% for self-sign on), as it included more hands-on event services like art/poster design and on-site gate/ticketing management and security.  Additionally, this channel had much higher customer acquisition costs (paying salespeople vs nearly all organic customer acquisition in self-sign on) and scaled poorly given it competed against companies like Live Nation.

Eventbrite charges event creators a 2% service + 2.5% processing + $0.79 fee on paid events, with higher fees for their professional service package. There is no charge for organizing free events. On average EB’s cut on a paid ticket ends up around 8% of the ticket’s face value. With processing costs averaging 2% of the ticket face value, EB’s incremental margins for self-sign on revenue are 75%.

Eventbrite’s competitive advantages (beyond scale as the #1 player) include fraud prevention which is one of the most difficult challenges for distributed ticketing platforms. Before founding Eventbrite, Kevin Hartz was an early investor in Paypal and co-founded an international remittance company, Xoom, in 2001 which he later sold to Paypal. Xoom had industry leading fraud loss rates of 17bps vs 100bps industry average. Having successfully tackled this problem, fraudulent actors are now more likely to seek out start up ticketing platforms instead of EB.

EB went public for $23 on 9/19/2018 and reached an all-time high on 9/26/2018 at $40.25. To bolster growth going into the IPO the company made several value-destructive acquisitions focused on the sales channel, including Ticketfly for $200 million, which specialized in larger scale music events. These acquisitions were margin dilutive and struggled to grow when competing with larger players like Ticketmaster. Disappointing growth caused a steep post IPO sell-off in EB shares, and the company ultimately decided to de-emphasize the sales channel and consolidate their acquired brands under the Eventbrite name. The company was in the middle of a business turnaround just before COVID hit.

Margin Transformation During COVD:

During COVID, Eventbrite implemented an aggressive $100 million cost reduction plan. The company reduced their global workforce by 45% and lowered their adjusted EBITDA breakeven revenue level by 45% versus their cost structure from the beginning of 2020. Prior to COVID, EB believed their EBITDA breakeven revenue level was $342-349 million, and in Q2 2021 the company managed to achieve EBITDA breakeven at an annualized revenue level of $185 million.

In addition to cutting costs, EB refocused the business around their higher margin self-sign on product and despite well below normal paid ticket volumes, the company has achieved their highest gross margins in history over the last two quarters, increasing to 65.9% for Q4 2021, a nearly 600 basis point improvement above the company’s pre-COVID gross margins.

Valuation:

Despite evidence of above pre-covid levels of demand for travel and live events, consensus estimates do not have Eventbrite reaching their pre-covid revenue run rate until 2023. We believe that level of revenue will occur this year, and with higher than expected EBITDA margins. At IPO, the company discussed targeting adjusted EBITDA margins in the mid to high 20s, but we believe with the company’s current margin and cost structure that 30-35% margins are achievable. Within the next two years we believe the company will generate revenue greater than $400 million which, at the current enterprise value of $1,250 million, would imply the company is currently trading at less than 10x normalized adjusted EBITDA.

Even including COVID periods, EB has averaged a price to CY+2 sales multiple of 5x. We believe forward revenue estimates are too low, and the company will achieve far above historic average margins, but using this historic average EB currently has upside of 40-60%.

A measure that takes margins into account, FY+2 EV/EBITDA, implies even further upside for the stock.

Marketing Initiatives:

We believe the Eventbrite story will continue to be attractive beyond the short-term rebound in demand as the company improves monetization by providing additional tools to event creators. The company’s current take rate of 8% is extremely low compared to other marketplaces. Up to 30-40% of the face value of a ticket is typically spent on marketing that event. Eventbrite’s new Boost product was created through their acquisition of ToneDen which they purchased for $7.5 million in November 2020 and is designed to expand Eventbrite’s take rate to capture those additional dollars spent on marketing events.

 The ToneDen product has been rebranded as Eventbrite Boost and provides an event marketing platform to creators initially available for a $50 subscription per month with additional monetization avenues as creators spend more marketing budget through Boost. Event creators on platform have seen ticket sales 16% higher per event than similar events not on platform and with Eventbrite providing the ticketing services, and marketing dollars spent on the platform have almost perfect attribution. This revenue stream has software margins that are even higher than EB’s long term 70% ticketing gross margins, can begin to monetize free event creators, and should provide an attractive growth story for the stock over the next few years after reopening has fully played out.

Finally, 20% of paid ticket volume is originated through Eventbrite controlled channels such as the company’s website and email list. These destinations do not currently feature sponsored listings, but we believe this will change over the next 1-2 years and should contribute meaningfully to expanding EB’s take rate as the company rolls out more demand generation opportunities for their creators.

Similar to EB, Etsy (Nasdaq:ETSY) operates a marketplace enabling the long tail of small to medium sized, heterogenous creators. Through the introduction of marketing services, ETSY was able to improve their take rate from 10.1% in 2014 to 17.3% in 2021. That period of improving take rate led to a dramatic rerating higher in ETSY shares after their IPO.

EB management appears confident in the current margin structure, future growth, and ability to expand take rate, as on the most recent earnings call they introduced several new KPI disclosures that will allow complete transparency in tracking the evolution of the company’s unit economics.

Forced Selling Opportunity:

In the past we have been able to take advantage of forced selling in small cap tech stocks as the VC funds that hold the shares mature past the fund’s typical 10-year life. One large EB holder, Sequoia Capital, owns their position through multiple 2010 vintage funds and has recently been reducing their position in Eventbrite which we believe has put significant pressure on the company’s stock price.

At the time of EB’s IPO, Sequoia collectively owned 13.4 million shares, or 20% of the outstanding. The largest entity within Sequoia that owns EB shares is SEQUOIA CAPITAL U.S. VENTURE 2010 FUND, L.P. which initially owned 9.6 million shares or 14.4% of the outstanding as of 12/31/2019 according to an SC 13G filed on 2/14/2020 with all Sequoia related entities owning 12.1 million shares or 17.5% at the time. Sequoia then released form 4s on 3/15/2021 and 5/27/2021 disclosing the distribution of more than 5 million EB shares to limited partners, taking Sequoia’s total ownership of Eventbrite to 6.9 million shares 12/31/2021 according to an SC 13G/A filed on 2/14/2022.

This left Sequoia’s ownership stake below the 10% form 4 filing requirement so the only updates on their ownership stake in Eventbrite going forward will come from annual proxy and SC 13G statements. However, if Sequoia is repeating their distribution schedule from last year, they should have almost entirely exited their stake in the company within the next 1-2 months.

Risks:

·      * Though it appears EB is focused on accretive tuck-in acquisitions to expand their self-sign on product offering currently, the same management team made a series of ill-advised and value destroying acquisitions focused on the company’s less profitable sales channel going into the IPO.

·      *   Delta and Omicron variants had large impacts on paid ticket volume activity and any new COVID variants have the potential to push out reopening activities once again.

·         * Post COVID behavior changes may favor larger concerts and festivals that Eventbrite has lower market share in.

Catalyst

As demand normailzes sales should improve and EB will recieve signficant opperating leverage on a lower cost base.