- Despegar.com, as the largest online travel agency in Latin America, is in the early stages of a post-pandemic recovery.
- Better-than-expected operating trends during the last quarter set up a positive outlook for 2022.
- We are bullish on the stock which has significant upside as it benefits from a return of travel in the region.
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Despegar.com (NYSE:DESP) is the leading online travel agency in Latin America operating across 20 countries. While this segment was particularly hard hit during the pandemic and continues to face disruptions, the industry has been defined by a strong rebound considering easing cross-board travel restrictions and a better sense of the health risks. Indeed, Despegar reported impressive trends in bookings during its last reported quarter in what is still an early stage recovery for air travel and tourism in the region. We are bullish on DESP which is well-positioned to extend its operating momentum through 2022, supporting firming financials. The stock trades at a depressed valuation relative to global online travel agency peers setting up a significant upside potential through a positive long-term outlook.
DESP Earnings Recap
The company reported its Q3 results back on November 17th with a non-GAAP EPS loss of -$0.38 which narrowed from -$0.58 in the period last year. The story was the improving metrics with 1.9 million transactions on the platform, compared to 596k Q3 2020. Gross bookings reached $657 million, up 298% year-over-year. The result is that revenue at $83.4 million, was 7x or 610% higher than the $11.7 million in the period last year.
(source: company IR)
This quarter was a turning point as most countries in the region began opening up borders amid improving Covid statistics. The main talking point from management during the conference call was that even as gross bookings were still down 44% from Q3 2019 as a pre-pandemic benchmark, the company's measure of adjusted EBITDA excluding one-off items at -$3.6 million nearly approached breakeven. Growth was led by bookings strength in key countries like Argentina, Brazil, Chile, Colombia, and Mexico. The trends accelerated into October covering the Q4 period, approaching 72% of 2019 levels. Higher average sales prices are also an important theme.
(source: company IR)
Another highlight from the quarter was momentum in the company's loyalty program known as "Passaporte Despegar" which now has 1 million members as a milestone. The company's fintech business "Koin", acquired in 2020 has helped with penetration in the Brazilian market considering partnerships with several new merchants for payments for travel financing options. In our view, Koin within Despegar adds a layer of diversification beyond travel with business-to-business solutions and a separate long-term growth drive. Koin has emerged as a leader in "buy-now, pay-later" where management believes represents a major long-term tailwind for the company.
While DESP is not issuing official financial targets, comments projected optimism for the improving conditions going forward. Despegar ended Q3 with $276 million in cash and an otherwise clean balance sheet with only $12 million in long-term debt. We view the balance sheet and liquidity position as a strong point in the company's investment profile.
DESP Stock Forecast
Despegar represents an attractive way to capture exposure to the post-pandemic recovery in Latin America. Our takeaway from the trends in Q3 is an encouraging setup into 2022. Consumers in the region are looking to travel both domestically and internationally, and Despegar.com is a major portal to book those types of reservations between plane tickets, lodging, rental cars, and activities.
In December, Brazilian airline Gol Linhas Aéreas Inteligentes S.A. (GOL) reported 14,257 November departures, up 10% month-over-month compared to October, and up 29% y/y. These types of trends bode well for DESP travel bookings. What's interesting is that it was only in November when the United States opened its borders for international travel from several countries that had been restricted since early 2020. We expect Despegar to get a boost for international bookings when it reports its Q4 results.
Looking back, some of the apocalyptic headlines out of the region during the pandemic which faced a slow-vaccination rollout and elevated rates of infection in early 2021 likely pressured sentiment not only in DESP but the broader region. The contrast now with the latest Omicron surge driving a record number of cases in "developed" economies highlights that the pandemic experience in Latin America has been largely in line with global trends. Curiously, Brazil and Chile have a higher proportion of fully vaccinated population at 67% and 86% each, compared to the United States at 62%. Simply put, traveling in these countries is just as safe as traveling anywhere else and supports Despegar's operating outlook.
The stock declined by about 23% in 2021 although a large part of this weakness was based on FX volatility considering dollar strength against currencies like the Brazilian Real. As a foreign stock, while FX variations continue to be a risk worth watching, but the other side is for the potential that the region currencies can rebound adding an incremental return for shares of DESP going forward. What we like about DESP is that it benefits from what are low expectations while it could end up benefiting if the region outperforms.
According to consensus, the forecast is for 2021 revenues including the yet-to-be reported Q4 results to reach $310 million, up 136% from 2020. While the expectation is for an EPS loss of -$1.19 this year, the market sees improving financials with EPS approaching breakeven by 2022 at -$0.03 as revenues climb another 68% to $521 million. By 2023, the market sees growth climbing 28% while the company turns profitable. We believe these forecasts are too conservative and the potential that DESP outperforms can be a catalyst for the stock.
As it relates to valuation, DESP with 81.8 million shares outstanding has a current market cap of around $831 million. The price to sales ratio on the consensus 2022 revenue ratio at 1.6x for DESP, by our calculation, represents a significant discount compared to global travel stocks like Booking Holdings Inc. (BKNG) at 6.4x, China's Trip.com Group (TCOM) at 3.9x, or Expedia Group, Inc. (EXPE) at 2.4x, and India's Yatra Online, Inc. (YTRA) both at 3.6x. With a net cash position on its balance sheet, DEPS is also valued at around 1.0x on an EV to forward revenue basis appears cheap in our opinion.
To be clear, Despegar.com's lack of current profitability and negative recurring cash flows explain some of this weakness, although we believe the spread is too wide considering the long-term growth outlook. DESP gaining momentum and outperforming expectations can generate significant upside for the stock as its growth multiple converges to the group.
Is DESP a Buy, Sell, or Hold?
We rate DESP as a buy with a price target of $16.00 for the year ahead, representing a 2.5x forward price to sales multiple on the current 2022 consensus and market cap right around $1.25 billion as a fair value. This level would better reflect the company's long-term opportunity in a high-growth region and current segment leadership in line with global peers. Notably, shares of DESP traded as high as $17.00 in early 2021 and we believe it can return towards that level. Longer-term, the ability to drive consistently climbing profitability can support an even higher valuation.
Keeping this in a high-risk category considering the uncertainties related to emerging markets and the stock's historical volatility, our thinking is that all the cards are in place for shares to breakout higher. A strong Q4 report with positive guidance from management from early 2022 trends can be a catalyst for shares to gain momentum.
The risk here would be a disappointing reversal of the recent trends leading to weaker than expected operating results. While the Omicron Covid variant is widely seen as displaying mild symptoms and only a temporary setback to the global post-pandemic recovery, the possibility that disruptions become more significant or longer-lasting would force a reassessment of the long-term outlook. Weaker-than-expected results over the next few quarters would also pressure sentiment towards the stock. As an emerging market stock, results are also exposed to FX risks and local trends in the economies of countries in the regions.
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This article was written by
Dan Victor, CFA is a market professional with more than 15 years of investment management experience across major financial institutions in research, strategy, and trading roles.
Dan leads the investing group Conviction Dossier, where his focus is on helping investors stay ahead of market trends and inflection points. Dan’s investing vehicles of choice are growth stocks, tactical exchange-traded funds, and option spreads. He shares model portfolios and research to help investors make better decisions, via his Investing Group’s active chat room.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of DESP either through stock ownership, options, or other derivatives. 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.
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