When eBay (NASDAQ:EBAY) bought StubHub in 2007, the online ticket resale market was still relatively small. The company generated just $100 million in revenue in 2006, but by 2015, eBay reported that StubHub commissions totaled $725 million.
And StubHub's growth may just be getting started. The company expanded organically to the U.K. in 2012, Germany in 2015, and Mexico earlier this year. In May, it bought TicketBis, which operates in 47 markets across Latin America, Europe, and Asia Pacific. It's also moving into TicketMaster's main business of selling first-party tickets, in addition to the ticket resales it already specializes in, thus opening the door to a much bigger market.
A high-margin business
Last year, StubHub accounted for less than 5% of gross merchandise volume sold across eBay's properties, but StubHub commissions made up more than 10% of the company's net transaction revenues.
StubHub's transaction take rate of 20.3% makes every sale on its platform much more profitable than the eBay marketplace, which has an average take rate of less than 8%. Therefore, the rapid growth in StubHub sales should translate into even faster profit growth for eBay. Overall, the secondary ticketing market is expected to grow more than 19% per year through 2020.
While its expansion and the industry growth should help propel StubHub's relatively high-margin revenue going forward, there's an even bigger opportunity in primary ticket sales. StubHub made its first foray into primary ticket sales earlier this year, inking a deal with the Philadelphia 76ers.
Live Nation, the parent company of TicketMaster, generated over $1.6 billion in revenue from its ticketing platforms last year. StubHub, by comparison, generated less than half of that: $725 million.
Although the operating margins on primary ticket sales are slightly lower than the secondary market, the primary ticket sales market is more than three times as large. As a result, TicketMaster is expected to generate $372 million in EBITDA this year, compared with just $214 million for StubHub.
After several missteps in the past couple of years, StubHub is now under new leadership with President Scott Cutler. He has aggressively expanded StubHub with the TicketBis acquisition and partnerships with the 76ers. He also reversed a pricing scheme that caused sales growth to plummet to 2% and net transaction revenue to fall 4% in 2014.
Cutler ought to remain aggressive, especially in light of TicketMaster's moves to increase its presence in the resale market. During StubHub's ticket pricing kerfuffle, TicketMaster was able to take a larger share of the secondary market. StubHub may look to bolster its leading position with more acquisitions in the secondary marketplace, with buyout targets such as Viagogo or Vivid Seats.
Meanwhile, investors should expect for StubHub to create more primary ticket partnerships. When the company announced its partnership with the 76ers, Cutler described it as an "evolution" of StubHub, implying more deals down the road.
Continued investment in StubHub should enable it to fend off moves from TicketMaster while breaking into new ground with primary ticket sales and new regions for secondary sales. That revenue will generate higher margins than eBay's main Marketplace business, providing outsize earnings growth. Analysts are currently expecting just 4.4% average annual earnings growth for eBay over the next five years, but they may be discounting the potential of StubHub.