Eventbrite: The Pandemic Will Crush This Stock

Summary

• Social distancing will have a strong negative impact on Eventbrite revenue for 2020.
• Chargebacks may result in a double-whammy for canceled events.
• Revenue growth was already anemic before the onset of the pandemic.
• I believe that Eventbrite is overpriced based on forward earnings estimates.
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The other day I wrote an article on Zoom Video (ZM), highlighting the opportunity presented by remote video conferencing during the coronavirus pandemic. Today, I am writing about Eventbrite, Inc. (NYSE:EB), a company at the opposite end of the spectrum. Eventbrite is a leader in event management. The company provides tools and incentives for creators to plan, promote and produce events. While Zoom Video provides a platform for remote communication which is an ideal product during pandemics, Eventbrite provides a platform for the promotion of live events and social interaction, not so desirable during pandemics.

(Source: Eventbrite)

Eventbrite management has already accounted for some early event cancelations in its 2020 forward guidance that was published at the end of February, but I doubt that the company anticipated the full impact of the pandemic and the "social distancing" that most countries are now starting to employ in combating the coronavirus. Not only do I expect that there will be a severe impact on Eventbrite's top line due to event cancelations and lower levels of new business, but the company's business model also makes it vulnerable to chargebacks as I shall describe later.

In addition to the coronavirus, Eventbrite's business is already suffering from anemic growth and is dependent on M&A activity to grow, particularly in Europe. This is also problematic as the company has had difficulty integrating acquired companies in the past. For example, Eventbrite acquired TicketFly in 2017 but only managed to retain 70% of customers.

For all of the above reasons, I am giving Eventbrite a neutral rating.

The Rule Of 40

One industry metric that is often used for software companies is the Rule of 40. It is an industry rule of thumb that attempts to help software companies ascertain how to balance growth and profitability. For a further description of the rule and calculation, please refer to one of my previous articles.

(Source: Portfolio123/MS Paint)

In Eventbrite's case:

Revenue Growth + FCF margin = 9.5% + 4.5% = 14%

Eventbrite scores 14%, well below the 40% needed to fulfill the Rule of 40. This signifies that Eventbrite has a lot of work to do in order to balance growth and profitability.

Cash Burn

As an investor, one wants to make sure that if a company doesn't score well on the Rule of 40, it is at least not burning cash. One can tell by examining the SG&A expense relative to sales.

Note that SG&A includes Sales & Marketing, General & Administrative, and R&D.

(Source: Portfolio123)

In the case of Eventbrite, the SG&A expense is 83% of the total revenues. This level of spend is not outrageous but is high for a company struggling to grow revenue by double-digits.

Stock Valuation

The following scatter plot of enterprise value/forward sales versus estimated forward Y-o-Y sales growth illustrates Eventbrite's stock valuation relative to the 152 stocks in my digital transformation stock universe.

(Source: Portfolio123/private software)

A best-fit line is drawn in red on the scatter plot and represents a typical valuation based on next year's sales growth. As can be seen from the scatter plot, Eventbrite is situated well below the best-fit line, implying that the company is very undervalued based on forward sales multiple.

The Sales/EV multiple tells me that the stock is undervalued, but my value assessment changes when I substitute next year's earnings estimates for forward sales.

(Source: Portfolio123/private software)

The results shown on this second scatter plot suggest that Eventbrite is overvalued based on next year's earnings estimates. It appears that the very poor forward earnings estimates are the root cause of the low forward sales multiple. It is unlikely that the earnings estimate will improve over the course of the year, so I have to conclude that Eventbrite is overvalued.

The Coronavirus Impact

Eventbrite's business centers around event management and is likely to be severely impacted by "social distancing," a term that we need to get used to for the next several months and probably for the remainder of 2020. Most public events are being canceled or postponed.

The impact of the pandemic on Eventbrite's performance is alluded to in the Q4 2019 earnings call:

The outbreak and any preventative or protective actions that governments, other third parties or we may take in respect of the coronavirus may result in a period of business disruption and reduced operations. A number of major events and conferences have been cancelled due to the coronavirus, and increased numbers of live event cancellations and reduced attendance rates at live events are likely to occur. We are seeing early evidence of event cancellations on the Eventbrite platform. The extent to which the coronavirus impacts our results will depend on future developments, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.

Keep in mind that this statement was made in late February and a lot has happened in the last couple of weeks.

Event Cancellations Are Sometimes a Double Whammy

Not only is event cancellation of concern for Eventbrite, but also transaction chargeback due to Eventbrite's business model. In some instances, Eventbrite provides advances to the event creator in advance of the event. Eventbrite typically recovers the advance by withholding amounts due as a result of ticket sales. Eventbrite also pays some creators a signing fee as an incentive for payment processing rights and exclusive ticketing.

(Source: Eventbrite annual report)

This is problematic and Eventbrite is unable to recover the money in some cases. The following risk is identified in the 2019 annual report:

The total write-off from all lost advance payouts and other chargebacks was $13.0 million, $6.1 million and $3.6 million for the years ended December 31, 2019, 2018 and 2017, respectively. Our failure to manage the risk of advance payouts to creators and to mitigate chargebacks and disputes due to fraud of a creator or otherwise or to recover the resulting losses from creators could harm our business, results of operations and financial condition.

As an example, an event was canceled in 2019 and it is unlikely that Eventbrite will recover any money:

On July 16, 2019, we filed two complaints in the United States District Court for the Northern District of California, entitled Eventbrite, Inc. v. MF Live, Inc., et al., 3:19-CV-04084 and Eventbrite, Inc. v. Fab Loranger et al., 3:19-CV-04083 (collectively, the Roxodus Lawsuits). The Roxodus Lawsuits arise out of MF Live’s (MFL) cancellation of the Roxodus music festival in Ontario, Canada, and MFL's and Loranger's subsequent refusals to issue refunds to impacted ticket buyers or to reimburse us for payments to such ticket buyers. We provided ticketing and payment processing services for the event pursuant to a written contract. When the event was cancelled and MFL refused to issue refunds, we issued refunds totaling $4.0 million to ticket buyers who bought tickets on our platform. ... MFL has filed for bankruptcy in Canada, staying our action against the entity.

This appears to be a fundamental weakness of the business model and I expect that this will become apparent with the wrath of cancellations that investors should expect this year. Not only will the company suffer as a result of cancellations, but it may also get stiffled with cancellation fees and ticket refunds if the event creator goes bankrupt or otherwise disappears.

Summary and Conclusions

Eventbrite is in a tough situation. This company provides a platform for event promotion, planning, and ticket sales. I expect that the coronavirus and government actions will put a big dent in the company's revenue for 2020 and this will be further complicated by event cancelations and chargebacks. Even if the pandemic issue is set aside, this company has fairly weak growth prospects and comes nowhere near to meeting the software Rule of 40. Based on forward earnings estimates I believe that the stock is overvalued. Therefore, I am giving Eventbrite a neutral rating.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.