eDream's My Best Re-Opening Play

Summary

• Leading the transition of transaction to subscription model in travel.
• Has the largest and fastest growing subscription program in travel.
• The subscription program ("Prime") alone is likely worth multiples of the current price.
• Nearly 100% leisure travel focused, which should bounce back fast as the vaccine is rolled out.

Photo by guvendemir/E+ via Getty Images

eDreams ODIGEO, S.A. (“eDreams) is an online travel agency (“OTA”) based in Spain. eDreams is the leading OTA for air travel. The company is severely undervalued. The path to value realization relies upon three main factors. First, the re-opening of the European economies for air travel. eDreams is nearly 100% focused on leisure travel. We believe that there is pent up demand for leisure travel, and this will rebound rapidly. Second, eDreams recently launched a subscription program called “Prime”, which charges subscribers ~60EUR per year, and for that subscribers get discounts on flights and hotels (other travels services will be introduced). Over the last year and during a global pandemic, they grew the number of subscribers 59% to 759,000. The Prime program has the effect of lowering customer acquisition costs, as Prime subscribers often book on the company app or by going directly to eDreams’ website, thereby bypassing search engines. Additionally, it makes the revenue stream more stable, which should cause multiple expansion. Finally, the company is expanding beyond flights. Seventy percent of the first money spent in travel is spent on flights. Once eDreams sells a flight, they have no customer acquisition cost after that. Therefore, they are in a cost advantaged position to sell hotels, experiences, rental cars, limo services, and other ancillary services.

History – Founding to Date:

2000 eDreams founded in Silicon Valley

2006 eDreams acquired by TA Associates for €153M in a leveraged buyout

2010 eDreams acquired by Permira for €350M in a leverage buyout

2011 eDreams acquires Opodo with Permira and Ardian

2011 eDreams ODIGEO formed in merger with Go Voyages

2013 eDreams acquires Liligo

2014 Completed IPO on the Madrid stock exchange for €10.25 per share which valued the company at approximately €1.5B with a €1.1B market capitalization

2014 eDreams faces competitive pressure driven by Google search keyword bidding. eDreams investigated for unfair practices through Opodo brand

2014 eDreams ends the year near with a price of €1.68 per share

2015 Dana Dunne appointed as CEO

2015 Dunne lays out plan to emphasize mobile booking; eDreams immediately begins to regain market share as leading flight OTA in Europe

2016 eDreams refinances its debt facility

2017 eDreams begins to roll out new transparent pricing models

2017 eDreams announces opening of a strategic review after receiving unsolicited bids for the company

208 eDreams ended its strategic review after determining the bids insufficient. While not disclosed, I believe the bids were in the €7.00 to €8.00 range

2018 eDreams announces plans to launch new Dynamic Packages offering in an effort to expand the platform into hotels, a high margin market

2019 eDreams launches eDreams Prime

2020 eDreams weathers the COVID 19 pandemic

Opportunity

After their IPO in 2014, the company made some missteps, which caused the stock price to tumble below €2.00 per share. The stock recovered but dove again after the strategic review was ended in 2018. Feeling burned, European institutions punted the stock, leaving it to be owned by two private equity sponsors, a handful of North American funds, and European retail investors. Despite being left for dead, the company, led by the new CEO Dana Dunne, has performed remarkably. Its share price is clawing its way back up and should be re-looked at by European institutions.

Non-Flight Revenue

As shown in the below table, its non-flight revenue (“Diversification” revenue) has been steadily growing. As mentioned earlier, given that there are no customer acquisition costs associated with this revenue stream, eDreams is in a competitively advantaged situation. Furthermore, competitors who focus mostly on hotels, will not be able to respond to eDreams’ growing business with price, as to do so would collapse the margins for their remaining business.

Customer Acquisition Cost

eDream’s low customer acquisition cost comes from circumventing search engines such as Google. The below chart shows the reduction of their costs since FY 2015, which is, in part, driven by the increased use of booking via their mobile app. Note that one of Dana Dunne’s initiatives was to build the best app in travel.

The Value of Prime

Prime has delivered substantial growth since first being launched two and a half years ago. They even grew 100k members per quarter during the pandemic with flights down by approximately 2/3rds. With lockdowns removed it is reasonable to assume that they grow 100k members per month.

Management’s publicly stated goal is to have 2,000,000 subscribers by FY 2023. This number seems highly conservative. Below is a chart showing the value of Prime giving no value to the rest of the company, i.e., you get the rest of the company for free. I capitalized Prime at a 4% FCF Yield, which is more than reasonable given its growth rate. Given no value to the rest of the company, you are in the money at 1,250,000 subscribers – a mere 492,000 more than they last reported. At 2,000,000 subs, the program is worth €13.65 a 178% premium over today’s price.

The below charts show the value of Prime at various levels of subscribers and FCF capitalization rates.

We are seeing the effects of Prime not only in their lowered customer acquisition cost, and more stable revenue, but also in their ability to pick up market share – they are growing faster than the industry.

Risks

• We are still in a global pandemic
  • Mitigant: The vaccines seem to be working with declining new cases and hospitalizations
• The company has a levered balance sheet
  • Mitigant: The company has a variable cost model and was able to maintain liquidity during the worst of the pandemic

• The stock price could fail to attract institutional buyers
  • Mitigant: Pre-pandemic, the company instituted a share repurchase program, this could be restarted
• The company was the target of a buyout offer; management could sell a too cheap of a price
  • Mitigant: They turned down an offer at likely a far superior price than the current price. I don’t see them selling too cheaply and anything slightly north of €10.00, while I think would be too cheap to sell, is a high-class problem

Catalysts

• The re-opening of Europe for leisure travel. Note that 40% of the adults in the UK have received the vaccination leading the government to announce definitive dates for the end of the lockdown. Management has said UK bookings post those dates are up materially
• The continued rollout of Prime and the recognition of its higher quality revenue
• Continued success growing their hotels business
• Introducing other travel services into Prime, such as activities, cars, and limos, which would make them truly a one-stop shop for travel