Two major trends are redefining the travel and leisure industry today. The first is the growing dominance of travel tech companies. These are companies that leverage internet-based technology to facilitate travel bookings and reservations, ride sharing and hailing, travel price comparison, and travel advice. These companies have grown in leaps and bounds over the past few years thanks to tailwinds such as increased accessibility to broadband internet, advances in digital payments and the widespread acceptance of online marketplaces by consumers.
Investors have been drawn in by the explosive growth of these companies, particularly in the wake of the pandemic when online services gained users at a faster pace relative to offline services across many different industries, including travel and leisure. Tellingly, the first exchange traded fund focusing exclusively on travel-tech companies was launched last year. ETFMG Travel Tech ETF (AWAY), which holds names such as Airbnb, Inc. (ABNB), Booking Holdings (BKNG), Trip.com (TCOM), and Uber Technologies (UBER) among others, has grown its Assets under Management (AuM) more than ten-fold from around $20 million at its launch in February 2020 to more than $250 million today -- underlining the heightened investor interest in the travel tech space.
The second trend at play in the travel and leisure industry is the emergence of luxury travel as one of the fastest growing market niches. Luxury travelers are wealthier than they have ever been due to the pile-up in savings during stay-at-home restrictions. Asset inflation has also resulted in a significant increase in the net-worth of affluent households that hold assets like equities, real estate, and alternative investments. Many are looking to splurge on new experiences and there is demand for luxury travel like there has never been before, creating growth opportunities for companies with exposure to the space.
In our view, both trends - the growing dominance of travel tech and the explosion in demand for luxury travel - are durable and likely to have a lasting impact on the broader industry for the foreseeable future. Investors in the industry would do well to seek exposure to companies that are riding on one or both trends.
Inspirato is a promising candidate for investors keen on profiting from both trends. The company, which is on track to go public at an estimated enterprise value of $1.1 billion in a deal with SPAC Thayer Ventures Acquisition Corp. (TVAC), has pioneered a luxury travel subscription platform that is proving to be a smashing success in terms of tapping into the hot demand for luxury travel.
Inspirato's subscription platform leverages proprietary technology to connect its luxury travel subscribers to more than 500 hotels and resorts and 385 residences in North America and other exotic international destinations, including Europe and the Caribbean. Subscribers can also access bespoke experiences and cruises.
Inspirato's flagship subscription service, dubbed 'Inspirato Pass', goes for $2500 per month and offers subscribers exclusive access to the company's wide array of luxury destinations without nightly rates, taxes or fees. Subscribers enjoy first-class personalized service throughout, with pre-trip planning, onsite concierge, and daily housekeeping. They can also book their next trip the day they check out of their current trip, enabling them to derive maximum value from their subscription.
The company's other subscription service, dubbed 'Inspirato Club', goes for $600 per month and subscribers pay nightly rates for exclusive access to the full Inspirato Collection of homes, hotels, resorts, and experiences. Like with Inspirato Pass, subscribers of Club also receive first-class, personalized service from a team of hospitality experts-from pre-trip planning, on-site concierge and daily housekeeping.
Resilient and scalable model
The company's Investor Presentation indicates that Inspirato Pass, the flagship product, netted more than 2,350 new subscribers between its launch in June 2019 and February 2020, growing Annual Recurring Revenue to $75 million over the period.
In the wake of the pandemic, the service has proven to be resilient with ARR averaging $54 million in Q4 of 2020 despite the general impact of the pandemic on travel and leisure at the time.
The rapid growth of Inspirato Pass just two years after its launch shows that the subscription travel model is not only scalable, but also resilient, considering the protracted impact of the pandemic on travel and leisure overall in the past year and a half.
"During the pandemic, Pass was incredibly resilient because these are high net worth folks who didn't want to give up their ability to have access to great travel," said Brent Handler, Inspirato CEO, in a one-on-one interview with this author.
"Our customers are not bound by how much money they make or what their salary is. The choice to subscribe has less to do with how much money they make versus the experience they want. They want service and certainty and that's what we aim to deliver in every customer experience," Handler explained.
Overall, the company typically offers more than 150,000 Pass Trips at any given time, and management expects the Pass and Club platforms to bring total ARRs north of $100 million by the first quarter of 2022 and reach $149 million as we move into 2023.
Seasoned executive team able to manage growth
The general challenge with new fast-growth products like Inspirato Pass is typically managing the pace of growth. Long-term success depends on a seasoned executive team that not only understands the product, market and the economics surrounding the business, but that is also able to manage rapid growth and the inevitable challenges that come with it. Inspirato, in our view, has an executive team that is up to this challenge.
Handler and his team are not new to managing rapid growth in the luxury travel space. Inspirato Club, which was launched in 2011 as the company's then flagship product, has enjoyed consistent growth from day one, with the company delivering eight consecutive years of growth with revenue CAGR of 39% from 2012-2019.
It's instructive to note that in 2018, before the launch of the new flagship product Inspirato Pass in the summer of 2019, the company was able to deliver $178 million in annual revenue from approximately 13,000 Club subscribers. The average annual retention rate for Club between 2017 and 2019 was an impressive 87% and 80% in 2020 amid the pandemic. Club customer retention history serves as a strong proof point for projected Pass performance.
"We are very fortunate that we've spent the last 10 years in Inspirato building a proven platform, a proven brand and a proven model," said Handler, who before starting Inspirato in 2010, founded Exclusive Resorts in 2002 and helped establish the destination club industry.
Given this impressive historical retention rate and the fact that Inspirato Pass's price point is at least four times Club's, the company is likely to see accelerated revenue growth as the subscriber mix moves more in favour of Pass, which is now the flagship product and understandably the core focus of management. The company's financial models indicate that for every 3,300 new Pass subscribers who sign up, ARR will grow by nearly $100 million, assuming current price points.
Inspirato is by all means a growth machine. The main question for investors is: is this another case of growth at any price or is Inspirato quality growth that results in positive EBITDA and eventually profitability.
Innovative supply model provides path to profitability
Inspirato does not own the luxury hotels, resorts and residences it makes available to its customers via Inspirato Club and Inspirato Pass but leases them. Moreover, 88% of its leases have a termination clause of one year or less while 87% of them have a force majeure clause. An asset-light leased portfolio with flexible termination rights and force majeure provides the benefits of control without the burdens of ownership.
Inspirato's leasing model also presents great value to the owners of luxury inventory. Luxury suppliers by definition have excess capacity that they can't sell since they always need their customers to have availability -- there is no luxury if you can't get it conveniently when you want it.
This excess capacity, while integral to the luxury business, strains the financial shape of luxury hospitality suppliers. There are high fixed costs associated with maintaining excess inventory. It's also impossible to directly sell excess capacity at a discount as that undermines the concept of a premium product. The end result is that many luxury resorts and residences record billions of dollars in spoilage annually.
By agreeing to avail luxury supply to subscribers via their platform instead of asking customers to book directly or through an agent, Inspirato provides true price opacity for suppliers. This gives it leeway to negotiate its own competitively priced leases confidentially.
"We basically allow hospitality suppliers to monetize excess inventory through an attractive opaque booking channel. Because of the savings this presents to owners both financially and in terms of brand equity, we are able to negotiate attractive rates. We typically buy at a 'percentage of' rather than a 'discount off'," explained Handler.
The cost savings that Inspirato enjoys as a result of its supply model translates into immense opportunity for margin growth. The company's 2020 adjusted EBITDA was $9.6 million and $5.5 million in 2019, and that was the year in which Inspirato Pass was launched. "In the year 2020 few players in travel were able to produce positive EBITDA due to obvious reasons. We however were able to deliver this, which speaks to the resilience of the subscription model," noted Handler. The company estimates that at the projected growth rates, adjusted EBITDA will reach $102.8 million by 2025, which is a 12% margin.
It's worth mentioning that there are a lot of SPACs today that need capital in order to stay solvent as they try to prove if there is a market or not for their product. This is not the case with Inspirato. It has proven that it can be profitable at scale. It is now investing new capital in order to grow faster and make subscription travel a bigger opportunity.
The SPAC transaction with TVAC is expected to provide up to $260 million in net cash proceeds for Inspirato, assuming no redemptions, including a committed PIPE totaling approximately $100 million. We believe this capital will prove instrumental in powering Inspirato's growth and feel that at the current valuation of TEV/2022 E Revenue of 3.0X it is undervalued with promising upside.