As the leading online travel agent (OTA) in Latin America, Despegar.com has experienced a share price decline of approximately 50% over the past twelve months.&a;nbsp; However, despite investor disinterest in Despegar.com, the company continues to generate double-digit volume growth.&a;nbsp; At $15 per share, Despegar.com looks like an attractive investment for long-term value investors.
Founded in 1999, Despegar operates under one primary brand, &l;em&g;Despegar.com&l;/em&g;, which means &a;ldquo;to take off&a;rdquo; in Spanish.&a;nbsp; A Latin American version of Expedia, Despegar offers airline tickets, hotels, bus tickets, car rentals, vacation packages, payment options, and other travel-related products and services.&a;nbsp; The Company went public in 2017 at $26/share, and it had over 140 million visitors to its online properties that year.&a;nbsp; During 2017, Despegar generated $4.3 billion in travel bookings and $524 million in revenue.
The Latin American travel market is both underdeveloped and highly fragmented, which bodes well for Despegar&a;rsquo;s ability to generate strong topline growth and margin expansion in the years to come.&a;nbsp; As online travel penetration in Latin America increases, Euromonitor expects the online travel market in Latin America to grow at a compound annual growth rate of 8.4% per annum through 2021.&a;nbsp; The travel industry is also more fragmented in Latin America; for example, the top ten hotel chains represent just 14% of the market, versus 50% in the United States.
Within Latin America, Despegar is the #1 OTA with over two decades of operations and significant brand equity, and it is poised to continue to gain market share going forward.&a;nbsp; Due to its strong brand recognition, more than 50% of Despegar&a;rsquo;s traffic comes directly to its websites. The Company is generating Latin America travel revenues that are roughly 1.5x larger than its largest OTA competitor, Booking.com.
Despegar also has an operating partnership with Expedia, which owns 13.9% of Despegar&a;rsquo;s shares and could very well decide to acquire the balance of the business at some point in the future.&a;nbsp; Expedia&a;rsquo;s cost basis for its Despegar shares, which were purchased several years ago while Despegar was still private, is above where the stock is currently trading.&a;nbsp; If you are using an Expedia website to book travel to Latin America, Expedia is likely offering you Despegar&a;rsquo;s inventory for your booking.&a;nbsp; Similarly, Latin America travelers who are planning trips to the United States are probably relying upon Expedia&a;rsquo;s travel inventory.
Unfortunately for Despegar investors, macroeconomic turbulence swept across Latin America in 2018, depressing economic growth and causing currency declines across the region.&a;nbsp; As a result, travel volumes have been contracting, as customers have been deferring travel purchases, delaying trips, and making cheaper travel plans.&a;nbsp; Also, investors fled from emerging market stocks in 2018, despite clear indicators that &l;a href=&q;http://www.forbes.com/sites/adamstrauss/2018/10/15/five-reasons-to-buy-emerging-markets/&q;&g;emerging market stocks are significantly undervalued relative to U.S. stocks&l;/a&g;.&a;nbsp; For all of these reasons, Despegar&a;rsquo;s share price has declined by more than 55% since its 2018 high.
The Company currently has over five dollars per share in cash on its balance sheet, representing one-third of Despegar&a;rsquo;s market capitalization.&a;nbsp; The balance sheet appears to be extremely solid, and cash flow should improve as Despegar&a;rsquo;s revenues and profit margins increase.
Value investors may want to take advantage of the current opportunity to buy a high quality, well-managed, growing business in Despegar at an attractive, undervalued price.&a;nbsp; Investors seem to be pricing in a worst case scenario for Despegar, despite solid short-term fundamentals and even more promising long-term fundamentals. Despegar&s;s attractive fundamentals, combined with a strong balance sheet and downtrodden valuation, should augur well for long-term investors.
&l;em&g;Disclosure:&a;nbsp;Adam Strauss owns Despegar.com in some of his funds. This article is for informational purposes only and is not a recommendation to buy or sell a security.&a;nbsp; The views are those of&a;nbsp;Adam Strauss as of the date of publication and are subject to change and to the&l;span&g;&a;nbsp;&l;/span&g;&l;a href=&q;http://www.appleseedcapital.com/disclosure/&q; target=&q;_blank&q; rel=&q;nofollow noopener noreferrer&q; target=&q;_blank&q;&g;disclaimers&l;span&g;&a;nbsp;&l;/span&g;&l;/a&g;of&l;span&g;&a;nbsp;&l;/span&g;&l;a href=&q;http://www.appleseedcapital.com/&q; target=&q;_blank&q; rel=&q;nofollow noopener noreferrer&q; target=&q;_blank&q;&g;Appleseed Capital&l;/a&g;.&l;/em&g;&l;/p&g;
No comments:
Post a Comment