Eventbrite(NYSE: EB), a company focused on live entertainment, recently went public. The company provides event organizers -- called "creators" -- with everything they need to put on a great live experience. Ticket sales, promotion, payment processing, and even analytics can all be handled on the company's scalable platform.
Wall Street seems excited by the company's potential: The stock soared about 60% on its first day of trading. Let's see how this company stacks up against my investment checklist.
Hundreds of concert fans facing a stage
Image source: Getty Images.
1. Financials
I like to invest in profit-gushing machines that carry lots of excess cash and little debt.
Here's an overview of Eventbrite's financials as they exist today:
Balance sheet: Eventbrite raised $230 million at its IPO. A large chunk of that capital was used to wipe out its modest debt load and retire all its preferred stock. The company's debt-free balance sheet is now packed with more than $375 million in cash.
Profits: Eventbrite is purposely choosing to plow all its gross profit back into the business in an effort to grow as fast as possible. As a result, the company posted a net loss of $15.5 million over the first six months of 2018. However, during that time, the company also generated $13 million in free cash flow, so profitability might not be that far away.
Margins: Eventbrite posted a gross margin of 58% in 2016. That number jumped to 60% in 2017, which suggests that the business is scaling. However, the company's operating margin and profit margin are both still in negative territory.
Overall, I'm not thrilled with Eventbrite's losses, but I like that its balance sheet is packed with cash, its gross margin is rising, and that it's already generating free cash flow.
2. Moat
Great investments usually enjoy some kind of competitive advantage over their rivals (commonly referred to as a moat). This helps them to defend their profits from the onslaught of competition.
The network effect: Creators are naturally attracted to the platform that draws the most eyeballs. Conversely, those seeking out live entertainment will want to search on the platform that has the most options. Eventbrite counted more than 700,000 creators on its platform last year and sold 200 million tickets to more than three million live events. While the company isn't devoid of competition -- say hi, Live Nation Entertainment -- I think it has grown big enough to benefit from some network effects. What's more, Eventbrite is laser-focused on the middle market, whereas Live Nation is focused on top-tier performers such as Taylor Swift and Beyonce, so the two companies are not exactly battling head to head.
High switching costs: Once creators sign on to Eventbrite's platform, they tend to stick around. The company boasted a 93% retention rate in 2016 and a 97% retention rate in 2017. Those figures suggest that it would be painful for a creator to switch to an alternative platform.
Intangible assets: Eventbrite's spending on marketing is decreasing as a percentage of revenue over time. That hints that word-of-mouth is helping to bring new creators to the brand. In fact, 95% of Eventbrite's creators signed themselves up last year. That suggests that the company's brand name is well known in the live-event community.
When added together, I think it is fair to say that Eventbrite does benefit from a competitive moat.
3. Potential
Eventbrite is currently in high-growth mode. The company's revenue grew 51% in 2017, which is impressive. Those thousands of creators and millions of events helped the company pull in $202 million in total sales in 2017.
Those numbers are impressive, but there's reason to believe there is still plenty of room left for growth. The company thinks that its top 12 markets alone could eventually see 1.1 billion paid ticket sales and $3.2 billion in gross ticket fees.
I also like that operating leverage could potentially start to kick in down the road as the business continues to scale. That could help drive ultra-fast profit growth for many years to come.
4. Customers
Customers are the lifeblood of any business. For that reason, I like to think about the interaction between the company and its customers from a number of dimensions:
Acquisition: Eventbrite does spend money on sales and marketing, but this figure is trending down as a percent of sales over time. That hints that acquiring customers is getting easier and easier for the company as it continues to grow. It's worth restating that 95% of Eventbrite's creators signed themselves up for the service, which is a positive sign.
Dependence: Eventbrite's retention rate of 97% in 2017 makes it clear that creators are very dependent on Eventbrite's platform. Having said that, buying a ticket to a live event is a completely discretionary purchase, so revenue could take a hit during an economic downturn.
Is revenue recurring? Most creators put on multiple live shows each year, so most of Eventbrite's revenue appears to be recurring in nature.
Pricing power: Eventbrite earns the majority of its revenue from ticket sales. The company charges a 2.5% ticket fee on every sale and an additional fee of $0.99. Since creators are very dependent on the platform and its gross margin ticked up over the last year, I think it is fair to say that the company boasts some pricing power.
5. Management and company culture
Eventbrite was founded in 2006 by three individuals: Julia Hartz, Kevin Hartz, and Renaud Visage.
Julia Hartz is the company's current CEO. She owns more than 11.6 million shares of company stock, which represents 14.6% of the company. She also controls about 16.5% of the voting power.
Kevin Hartz, her husband, serves as Eventbrite's chairman. He was CEO for more than a decade and previously was co-founder and CEO of Xoom Corporation, which is an international money-transfer business that was acquired by PayPal in 2015. He also owns 11.6 million shares of Eventbrite stock and controls 16.5% of the voting power.
Renaud Visage previously served as Eventbrite's chief technology officer. However, he doesn't appear to hold a meaningful amount of company stock.
I like seeing that the co-founders are still active in the company's leadership, and two of them clearly have a lot of skin in the game.
The company also appears to get great reviews from employees. On Glassdoor.com, the company gets a strong 4.5 stars out of 5, and 87% of workers would recommend the business to a friend. CEO Julia Hartz boasts an overall approval rating of 97%.
With invested leaders calling the shots and glowing reviews from employees, I think it is clear that Eventbrite has a strong management team in place.
6. The stock
I'm a firm believer that winners tend to keep on winning, so I like to see that the stock has beaten the market since its IPO. I also like to see that the company has a history of exceeding Wall Street's earnings expectations.
Since Eventbrite just became public a few days ago, we do not have a lot of data to work with yet. However, I'll take it as a good sign that the stock popped about 60% on its first day of trading.
Red flags?
I've made a bunch of mistakes in my investing career, so I've learned to watch for a number of warning signs in any business:
Is it a penny stock? No. Shares currently trade for about $36, and the business is worth more than $2.5 billion.
Is there excess customer concentration? No single customer accounted for more than 10% of revenue or accounts receivable in the last three years.
Does the industry face long-term headwinds? No. The market for live entertainment is growing. In fact, many consumers prefer to spend their money on experiences instead of things. That should act as a long-term tailwind for the business.
Does the business rely on any outside forces for success? Sort of. Success doesn't depend on interest rate movements or strong commodity prices, but a significant economic downturn would likely curb demand for live events, since they are a completely discretionary purchase.
Is stock-based compensation excessive? Stock-based compensation expense was $8.1 million through the first six months of 2018. That's not excessive when compared with the company's $201 million in total revenue last year or its market cap of $2.5 billion.
Eventbrite looks like a buy
While Eventbrite didn't ace my test, it came pretty close. I think there's a lot to like like about this business.
My personal plan is to green-thumb Eventbrite in CAPS today and keep it on my watch list for at least a quarter or two (a good practice for any recent IPO to see how it adjusts to life as a public company). If the business manages to surprise to the upside during its first few earnings reports, then I'd be happy to initiate a starter position.
Brian Feroldi owns shares of Live Nation Entertainment. The Motley Fool owns shares of and recommends PayPal Holdings. The Motley Fool recommends Live Nation Entertainment. The Motley Fool has a disclosure policy.
