Shares of Eventbrite (NYSE:EB) tumbled after the event planning and ticketing platform reported first-quarter numbers which sharply missed expectations, while simultaneously delivering a below-consensus second-quarter guide. EB stock dropped more than 30% in response. The stock now trades below its $18 IPO price for the first time ever.
The underlying story here is not good. Revenue growth is rapidly slowing amid mounting competition and some internal issues. Expense growth is not. Net result? Losses are widening, and the prospect of future profits remains elusive.
To be sure, there is still a solid long-term growth narrative here. Broadly speaking, consumers are shifting increasingly towards spending on experiences, event creators are increasingly looking to manage event planning and tracking on their own, and all of this is being done in increasing volume through digital and mobile channels. Those three trends create healthy secular tailwinds for Eventbrite’s business over the next several years.
But, valuation concerns ultimately trump that growth narrative, mostly because costs in this business are huge, growth is slowing, and profits won’t ever be that big.
Consequently, while EB stock may very well bounce back from this recent sell-off, valuation concerns will ultimately limit medium- to long-term upside in this stock.
Long-Term Drivers Are Healthy
In the big picture, the long-term growth drivers supporting EB stock are healthy.
Specifically, Eventbrite is an event planning and ticketing platform that allows event creators to plan, produce, promote, and track their events, and consumers to buy tickets to those events. These two processes are supported by secular growth drivers. On the creator side, event creators are increasingly looking to manage event planning and tracking in a world immersed in data and analytics. On the consumer side, consumers are increasingly looking to splurge on event-oriented experiences, thanks to the overarching shift towards an experience-driven economy.
Broadly, then, current economic and social trends imply that Eventbrite’s growth narrative is far from over. Over the next several years, more event creators will pivot towards Eventbrite to plan, produce, promote, and track their events as doing so becomes the norm. Simultaneously, more consumer interest in event-related experiences will rise, and more consumers will use Eventbrite to buy event tickets.
The big-picture numbers here are pretty good too. Eventbrite sold less than 100 million tickets last year. But, the addressable market for paid-event tickets measures somewhere around 4.6 billion tickets annually. Thus, Eventbrite is only tapping into about 2% of its addressable market at scale, implying that big growth can persist for a lot longer.
Overall, the long term EB growth narrative isn’t all that bad. Instead, it’s actually quite promising on the revenue front.
Valuation Concerns Remain
The issue with EB stock isn’t its secular growth narrative. Instead, the issue with EB stock is its valuation relative to that growth narrative.
The reality here is that while growth can — and will — remain robust for a lot longer, that growth is slowing. In 2017, ticket growth was roughly 60%. Ticket growth started out 2018 above 60%, and ended the year below 20%. To start 2019, ticket growth is up less than 15%. Meanwhile, revenue growth has followed a similar rapid deceleration track, from over 50% in 2017 to under 10% last quarter.
To be sure, some of this slowdown is attributable to internal issues, such as the integration of Ticketfly. But, there’s another piece to this slowdown which has to do with longer-running factors, such as increased competition on the ticketing front. Broadly, then, while growth should pick back up later this year and over the next several years, it likely won’t ever return to its 30%-plus, 40%-plus, and 50%-plus levels.
The problem with growth not getting back to those levels is that it makes it hard for operating leverage to kick in. Revenue growth may be slowing. But, expense growth is not, because this company is investing to try and keep growing. Consequently, adjusted EBITDA margins are already starting to fall back, and the company is actually expected to report an adjusted EBITDA loss in 2Q19, versus a profit in 2Q18.
At scale, this slowing revenue growth and rising operating expenses trend creates problems. Namely, it makes the long-term profit potential for the company seem quite small. Until those problems are fixed, EB stock will remain weak, because profits will remain elusive.
Bottom Line on EB Stock
Buying the dip in EB stock here may be the right move. You have a growth stock that has dropped in a big way, and could rebound in a strong market that is favoring growth more than ever.
But, ultimately, valuation concerns related to slowing growth, rising expenses, and elusive profits will limit medium- to long-term upside in the stock. That’s why I’m choosing to stay on the sidelines for now.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
