DESP - Despegar.com: Watch Out For A Possible Rebound Soon

Summary

• Despegar.com could present an opportunity in the travel services industry.
• The Argentinian online travel and holiday services company is benefiting from robust demand in South America for domestic and international leisure activities.
• Investors' higher risk aversion to US-listed stocks has impacted Despegar.com's stock price performance, but seasonality and another strong catalyst could result in an interesting price action soon.

Looking for Opportunities in the Travel Services Industry: Despegar.com

Looking for opportunities in the travel industry based on people's desire for vacations after the COVID-19 virus pandemic, Despegar.com, Corp. ( DESP ) does not go unnoticed by the detector.

The potential for an interesting near-term recovery in the stock price could generate interest in holding or even buying shares.

Potential is currently defined by the likelihood of a positive impact from seasonal factors, supported by an ongoing business recovery amid robust South American domestic and international holiday demand.

The combination could potentially lead to sharp increases in share prices.

Despegar.com, Corp. In Travel Services Industry

Despegar.com, Corp., headquartered in Buenos Aires, operates an online travel company in Latin America.

In addition to the Despegar and Decolar brands, the group also owns the Best Day, Viajes Falabella and Koin brands.

The latter is a fintech provider of digital payments.

The company says it has served more than 29 million Latin American customers over the past two decades.

The company aims to help people enjoy their lives and strives to promote alternative payment methods and financing to facilitate Latin Americans' access to travel industry services.

Latin American customers can take advantage of Despegar.com's wide range of travel and travel-related products available on the websites and through mobile applications.

The company operates through two segments, namely the Air segment and the Package Travel, Hotels and Other Travel Products segment.

The first segment offers airline tickets, while the second segment offers travel packages, hotel rooms, rental cars, bus and cruise tickets, travel insurance, destination services and other travel-related products.

The Despegar.com marketplace allows Latin American consumers to find and compare travel products and plan trips.

Despegar.com also makes its technology available to travel suppliers to manage their travel products and access travelers.

Continued Positive Trends In Despegar.com Sales And Profits

For the third quarter of 2022, total revenue was $145.6 million, an increase of 75% over the same quarter of 2021 and an increase of 10% over the same quarter of 2019.

The airline segment, or the sale of airline tickets, accounted for 40.7% of total revenue in the third quarter of 2022, up 85% year on year and up 16% from the same quarter in 2019.

The packages, hotels and other travel products segment, which may include airline tickets and other products in addition to hotel rooms, accounted for 58.5% of total revenue in the third quarter of 2022, up 66% year on year and up 5% from three years ago.

While the financial services segment, which offers personal loan services and "Buy Now Pay Later" technology services, accounted for 2.6% of total revenue in the third quarter of 2022, a 9.5x increase year over year.

Year over year, the company reported a 44-basis point improvement in revenue margin to 13.1%, reflecting not only significantly fewer cancellations but also a higher take rate achieved in Mexico and Argentina.

Instead, the improvement was 191 basis points compared to the same quarter of 2019, reflecting not only higher upfront incentives but also customer fees.

Total Adjusted EBITDA was $12 million for the third quarter of 2022, reflecting a positive trend reversal from the net loss of $10.3 million in the same quarter of 2021 and growth of 28% over the same quarter of 2019. The earnings line benefited from a higher average selling price and take rate.

The 39% year over year increase in operating expenses to $93.9 million in the third quarter of 2022 was driven by higher sales and marketing expenses as the company seeks to increase its presence in the South American market, especially in Brazil. The increase in operating expenses was also due to higher general and administrative expenses, mainly due to foreign exchange unfavorable fluctuations and local inflation, as well as increased technology and product development due to the hiring of developers. The company also had higher financing costs related to factoring receivables in Brazil.

The company says that since it has focused on improving its operating leverage, these cost items have actually declined when viewed as a percentage of Despegar.com's gross bookings.

Despegar.com ended the third quarter of 2022 with a diluted GAAP net loss of $0.21 versus a diluted GAAP net loss of $0.38 in Q3 2021 while the average number of shares outstanding for the third quarter of 2022 was 81,544,000 versus 81,841,000 in the third quarter of 2021.

How Operations Are Performing

Despegar.com, Corp. recorded a 21% year on year increase in the number of transactions to nearly 2.21 million in the third quarter of 2022, but still marks a lower level compared to about 2.72 million transactions in the same quarter of 2019 (before the COVID-19 virus-induced pandemic).

The number of transactions was split at a ratio of approximately 50/50 between the Air segment and the Packages, Hotels & Other Travel Products segment.

Compared to the first segment, the second segment grew almost 2.5 times faster year on year while declining approximately 4.1 times less since the third quarter of 2019.

Essentially, overall transactions improved year on year thanks to higher demand in Brazil and Argentina for international travel as international flight restrictions were lifted. However, staff shortages at several international airports continued to create headwinds, which explains why flight transactions in the third quarter of 2022 were still not on par with pre-pandemic levels.

Total gross bookings for the third quarter of 2022 were $1.1 billion, up 68% year over year and nearly matching the level of the third quarter of 2019. The improvement was achieved thanks to strong demand for domestic trips coupled with a good recovery in the demand for overseas trips despite capacity issues at several international airports.

The higher average selling price of $503 increased by 40% compared to Q3 2021 and by 16% compared to Q3 2019, supported by growing demand for travel, particularly internationally, and increased inflation in countries in South America.

The Financial Condition of Despegar.com

The company believes the cash position of $263 million as of September 30, 2022, will provide the financial flexibility needed to grow Despegar's business.

Despegar is pursuing this goal by expanding its vacation rental portfolio (there were 21,600 units on the company's vacation rental platform in Q3 2022) and further improving conversion and acceptance rates through the acquisition of Brazilian online travel agency Viajanet.

However, based on the following two metrics, the balance sheet does not appear to be financially sound.

Indeed, Altman Z Score -0.07% implies a risk of bankruptcy that could occur within a few years.

While comparing Despegar.com's weighted average cost of capital of 13.72% to Despegar.com's return on investment of -2.39% shows that Despegar.com is destroying value when it should be creating value instead.

The financial position needs to make a significant qualitative leap, which will require time and skill on the part of the board, but judging by the course the company has taken, the goal is within reach.

What to Expect in the Future

Although Despegar.com's travel demand is still far from the level it was before the COVID-19 virus pandemic, the company continues to see improvements despite multiple headwinds caused by macroeconomic and global political issues.

There's no doubt that high inflation (which hasn't spared travel and vacation packages), rising fuel prices leading to more expensive airline tickets and rising cash costs discouraging lending have played against Despegar.com. Travel services make up the list of consumer products that consumers tend to reduce as disposable income is challenged by the factors mentioned.

In addition, the company is also struggling with the inability of several international airports to handle increased travel volumes, which are still far from pre-pandemic levels, partially due to insufficient ground staff. But this kind of issue affects its competitors as well.

However, the significant improvement in transactions and bookings, mainly due to the travel and holiday desires of Brazilians and Argentinians, despite the economic uncertainty that also prevails in their countries, bodes well for Despegar.com shareholders for the long-term potential of their company. Of course, positive sentiment towards US equities is also necessary for the share price to up-trend.

Therefore, the outlook for Despegar.com's business is positive, given that the company's strategy of increasing its profitability through a disciplined management approach is supported by strong South American demand for traveling and vacations.

In the short term, the company expects profitability to improve further in the fourth quarter of 2022. Given the positive trends outlined above and the solid base provided by strong South American travel and vacation demand, there's good reason to believe it will be as forecast by the company.

Added to this is the seasonality factor, which increases the likelihood that the company's anticipated event will provide a strong basis for higher prices in the period between mid-February and mid-March.

As can be seen in the chart below from Investing.com, usually the stock price recovers after the last quarter of the year, as that quarter largely coincides with the South American summer and thus the holiday season.

Despegar.com Corp is expected to report its fourth quarter 2022 results on Thursday, March 9th, after which the stock price could potentially recover significantly.

The Stock Valuation

Despegar.com, Corp. shares are down nearly 43% over the past year amid the strong known headwinds of macroeconomic and geopolitical factors.

The share price, which has been trading at $5.76 for a market cap of $372.3 million as of this writing, has fallen a lot and is now close to the 50-day simple moving average and well below the 100- and 200-day simple moving average lines.

Also, the stock has a 52-week range of $4.44 to $12.70, and it doesn't pay dividends. The TTM Price / Sales ratio is 0.89 versus the sector median of 0.93, while the FWD Price / Sales ratio is 0.68 versus the sector median of 0.93.

Despite the improvement in the company's financial and operating results, the stock price declined, not steadily but through ups and downs.

With such underperformance, investors generally tend to lose interest in their holdings unless there is a possibility of an interesting movement in the stock price. If there's one, it will likely be short-lived and not due to a change in market sentiment, so it could attract experienced traders rather than investors.

The last category of market participants will still be weighed down by the following factors.

There will be no shortage of strong headwinds that could put long-term pressure on Despegar.com's stock price for weeks or a few months, which could cause it to drift further into negative territory despite improving business metrics.

The headwind factors will look something like this:

• expensive gasoline due to geopolitical tensions due to the war in Ukraine will further increase airfares
• the Covid-19 virus is still a specter and threatens new restrictions on some intercontinental travel
• inflation and the rise in the cost of money to contain the former will continue to weigh on consumption, particularly discretionary consumption
• in addition, the expected recession for this year will discourage certain purchases of consumer goods and services.

All these factors will continue to fuel bearish sentiment, limiting opportunities for a stock price recovery to very few, like the one depicted in the chart above.

Not for long-term investment purposes, but a Hold/Buy recommendation would be more appropriate for traders waiting to catch a short-lived trend reversal, with the next possible one between mid-February and mid-March.

The FIFA World Cup in Qatar from mid-November to mid-December 2022 may have made a strong contribution to Despegar.com's financial results in the last quarter of 2022 as thousands of people from Mexico, Brazil and Argentina traveled to the Middle East country to support their national football teams.

Conclusion

Online travel services company Despegar.com stands to benefit from positive momentum in South American demand for domestic and international travel despite high inflation and, more importantly, the risk of an economic slowdown.

As such, operational and financial metrics should continue to improve, which should help bring on board some financial strength that would be like manna for a rather weak-looking balance sheet.

However, the stock price will be under strong downward pressure from known headwinds caused by macroeconomic and geopolitical factors.

Loyal shareholders might see the market value of their Despegar.com assets continue to decline in the coming months until market sentiment shifts, but there could also be interesting short-lived stock price swings that traders can take advantage of.

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