Description

Overview

Despegar.com is the leading OTA in Latin America operating under several brands including Despegar, Decolar, BestDay, Viajes Falabella, HotelDo, Vijanet, and Stays.net. The group maintains a leading presence in key markets such as Brazil, Mexico, Argentina, Chile, and Colombia. In 2017, the company went public at $26/share ($1.8bn mkt cap | $1.5bn EV) and in the first months of trading reached a high of $34/share ($2.3bn mkt cap | $2.0bn EV). At that time the group had $3.8bn in gross bookings and Argentina accounted for 25% of all transactions. Today, Despegar is on pace to exceed $5bn in gross bookings in 2023, with a higher average take rate, and Argentina accounts for only 14% of transactions. The company now trades at $5.5/share ($450m mkt cap | $450m EV), or a share price less than all but a handful of days early in the covid crisis when company revenues dropped to zero overnight. 

Travel in Latin America

Travel is a structurally growing industry, and I believe OTAs are one of the best ways to capture this structural growth. Consider that over the last five decades, both worldwide and in Latin America, there has only been one three year period, pre-covid, where passenger growth was negative. In effect, global air passenger traffic grows nearly every year, and as a rule of thumb, approximately doubles every fifteen years. In addition, in Latin America, the propensity to travel is starting from a very low base and digital travel bookings are highly underpenetrated. For instance, travelers in the United States take 2.1 trips per year on average, compared with 0.57 trips per year on average for Latin American travelers. Also, online travel currently represents only 42% of total travel bookings in Latin America, compared with 72% in the United States. The result is a growth rate of digital bookings in Latin America, the relevant static for OTAs, that is highly attractive. 

Competitive Landscape

Over the last several years, Google has been an elephant in the room for travel distributors. While Google has long been an essential partner and source of customer traffic, many feared that the company was taking the travel industry head on when it launched its Instant Book option in 2015. In essence, transitioning from an advertising model (CPC) to a travel agency itself (% of GB). As many correctly observed, this was a much bigger problem for metasearch players (Trivago, Tripadvisor, etc.) given that the vast majority of hotel supply was still sourced from the OTAs. However, there have been several recent important developments. In 2022, Google opted to discontinue its instant booking option for both hotels and flights and transition back to a pure metasearch model. This was a big win for OTAs who can again view Google as a pure supplier of traffic. It is probably worth noting here that, in my view, the entire metsearch industry is in a really challenging position. Google is the defacto starting place for global search, and as such, has an incredible travel metasearch business. Its marginal cost of acquiring traffic is essentially zero. The other metasearch businesses are paying Google for traffic, while fighting against Google’s own travel meta product, and trying to sell that traffic to OTAs. At the same time, the OTAs are also bidding on that same traffic and have become increasingly focused on acquiring customers that likely convert to future organic bookings (i.e. via brand investment), vs pure performance marketing channels (i.e. metasearch). In addition to this, the customer experience is discernibly worse in metasearch, you get pushed to another supplier website which can create problems and makes for longer bookings, and none of the payment or traveler information is saved. On top of that, the lack of control over supply makes product innovation challenging and the ability to create an attractive rewards program limited. That discussion out of the way, back to Latin America, Despegar’s competitors can be segmented into three primary groups: (i) global, (ii) regional, and (iii) supplier-direct. Despegar competes with both Expedia and Booking.com. Expedia is really only a relevant competitor in Mexico, while Booking.com is highly focused on Brazil and is thought of almost exclusively as a hotel only provider throughout Latin America (Booking still does not offer flights in many Latin American markets). Beyond its decades of local expertise, and $1.7bn+ of lifetime brand investments, Despegar’s installments platform is a significant differentiator from global competitors. Within regional competitors, Despegar competes with smaller OTAs that are often focused on a single country market and local offline travel agencies. The most notable offline competitor is CVC, the largest tour operator in Brazil with 1,200 physical store locations. CVC has successfully doubled its unit count over the last decade by adding new franchisees and converting independent travel agents into franchisees. However, the number of existing store units has declined 20% since the pandemic and is unlikely to be a source of growth going forward. Finally, Despegar competes with its own travel suppliers that are aiming to increase their own share of direct bookings. On this front, airlines are in a much stronger position as the industry is far less fragmented than the hotel industry. However, beyond offering consumers a convenient one stop shopping experience, Despegar has a far superior technology stack to most Latin American airlines and they leverage this to act as a true partner. For example, Despegar actively monitors thousands of flight routes and will actively approach airline partners if they feel they can help increase the load factor on a coming route that is performing below where it should be. Often this will look like the airline giving Despegar an additional commission, and Despegar will prioritize that route in its search results, offer more appealing installment terms on that route, include it on a bundled vacation package, etc. Outside of this there are many examples of travel itineraries that an OTA can offer that simply can’t be matched by a single supplier. The simplest example is a flight that includes one airline to the destination and one airline back. However, OTAs also offer the ability to include interline travel (2+ airlines to one destination), and multimodal travel (air + rail / bus / rental) options for comparison, and I believe we are early in the innovation cycle. Finally, it is worth noting that Despegar even operates the backend platforms for some of the largest airlines including LATAM airlines and SKY. 

Pasaporte Despegar

There has been a renewed focus across the travel industry to invigorate loyalty programs. Critically, OTA’s strategic position in the travel landscape offers important advantages for offering a comprehensive cross-product program. Reward points earned on hotels can be redeemed for flights and vice versa, points earned on one hotel can be redeemed across thousands of hotels, not only at a specified chain, points earned on flights can be redeemed on any airline, and consumers can often double-dip by earning airline miles on OTA booked flights. In 2019, Despegar launched its first loyalty program, Pasaporte Despegar. At the highest membership level, customers can receive 20% off on select hotel properties plus 6% back on every dollar spent, a program structure that is substantially more attractive than Booking.com and Expedia’s loyalty program. Despegar had reached 12.1 million loyalty members as of December 2022, up from only 1 million members at the end of 2021. In markets where the loyalty program is deployed, Pasaporte members account for 75% of all purchases and point redemptions are already occurring on 5% of all transactions. 

M&A

Despegar’s existing technology infrastructure provides an advantaged platform to consolidate regional OTAs. Over the last 5 years, Despegar has acquired Viajes Falabella (Chile/Peru), BestDay (Mexico), and Viajanet (Brazil). They paid on average approximately 0.5x revenue for each business, and have proven out a highly effective and simple playbook for increasing margins. In short, (i) merge the supplier inventory of the acquired company and optimize commercial agreements of overlapping suppliers, (ii) improve UX and performance marketing by leveraging Despegar’s technology, (iii) substantially reduce redundant local overhead, and (iv) cross sell higher margin inventory where possible. The result has been an extremely high cash flow conversion of acquired revenue. In fact, Despegar’s first two acquisitions, Viajes Falabella and BestDay, have penciled out to a ~2x EBITDA multiple acquisitions post synergies. To the extent that Despegar can continue bolting on assets to its platform, this could drive a substantial amount of shareholder value. There is not an endless list of attractive targets remaining, but there are a few, such as HotelUrbano in Brazil, or PriceTravel in Mexico, where I would really love to see a deal get done. Finally, I think it is worth calling to attention the attractive deal structures Despegar achieves in these transactions. In January 2020, Despegar announced that it was acquiring BestDay for $136m, or 1x revenue, where ~2/3rd of the consideration would be due at closing and ~1/3rd due 36 months after close. When the pandemic hit they recut the deal such that they paid a base consideration of ~$60m, which almost entirely consisted of assuming BestDay’s negative net working capital, with an earnout of between $0-$20m to be paid 48 months after deal close based on Despegar’s share price. The earnout is $0 if the share price is less than $10 (~2x), and increases proportionately to a maximum of $20m at a share price of $25 (~5x).  Incredibly, because BestDay is primarily a hotels business and has natural negative working capital dynamics, it is possible that, depending on the ultimate earnout, Despegar would have effectively acquired this business for free, or less than free, as travel has normalized. Based on the $140m in 2019 revenue, I estimate that BestDay would be in the neighborhood of $700m-$800m in gross bookings. The average customer books 6 weeks before their travel stay, and Despegar gets paid upfront and ultimately pays the hotel after the stay occurs. Thus I think a steady state negative working capital balance for BestDay is in the range of $70m-$80m. For the acquisition of Viajes Falabella in 2019, Despegar was able to structure the deal such that 60% was due at close and 20% due 12 months thereafter and 20% due 24 months thereafter. For the acquisition of Viajanet in 2022, Despegar was able to structure the transaction such that 60% was due at close and 20% due 24 months thereafter and 20% due 36 months thereafter. Finally, while it was not a regional OTA, Despegar also acquired a fintech business, Koin, in 2020 by converting $4m of receivables it was owed into an 84% equity position at a time of peak stress. It then later acquired the remaining 16% for $3.2m in cash consideration. As we will discuss later, I believe this segment could be worth many many multiples of this purchase price. 

Product Diversification

Despegar has grown substantially in product scope since launching as a flights-only travel agency in 1999. The group extended its offering to include hotels in 2009, packages in 2012, and now also offers vacation rentals, car rentals, in-destination services, as well as many other ancillary products. Prior to IPO, Despegar’s business on a revenue basis was split roughly 50/50 between air and hotels & packages. Today, Despegar is trending toward mid-60s percent revenue coming from hotels & packages which are substantially higher margin than air products. Of note, the packages segment has become the fastest growing product category for Despegar and reflects the unique preference Latin American travelers have to purchase complete trips. This is both more convenient and cost effective for the consumer, but also increases margins for Despegar as they can opaque underlying fares by bundling under one quoted price which allows them to access rates unavailable on a stand-alone product basis. Notably, while some of these transactions are traditional pre-bundled packages, the vast majority are dynamic packages where customers assemble a custom itinerary on Despegar’s platform and are quoted one discounted price. 

Despegar has also established a strong and growing B2B business which currently accounts for 12% of total gross bookings and is expected to scale meaningfully in the coming years. This segment consists of both an affiliate program, where third party travel agents sell Despegar inventory either through API (for larger TAs) or through its web platform (for smaller TAs). And a white label platform where Despegar operates the travel platforms for some of the largest domestic brands. These are extremely high incremental margin revenue lines, as they don’t require the marketing burden of the B2C segment, and Despegar believes they can be 3x in dollar size by 2025. 

A+ Team

After spending a substantial amount of time with both current and former members of the Despegar team over the last 4 years, I believe they have an extremely high quality team. Damian Scokin, CEO of Despegar, and ex-McKinsey and LATAM Airlines, has made tremendous strides to professionalize the business since IPO, from what was anecdotally a chaotic start-up environment. A heavy emphasis on data driven ROI decision making was institutionalized, and other strategic initiatives to drive shareholder value, such as inorganic growth, was added to the toolkit for the first time.  At a high level, Despegar remains a coveted job for developer and engineering talent, which is evidenced in part by former Despegar team members who have gone on to fill very senior roles at Meli, Rappi, and other large Latin American technology companies. Notably, nearly every former I have spoken with who have gone on to Meli or otherwise, believe the team in place at Despegar remains one of the best, if not the best, in the travel space. An area where this comes to light is the group’s performance marketing analytics team, which I believe is likely on par with that of the large global OTAs, but vastly ahead of local and regional competitors. For example, Despegar believes that they can predict with a high degree of accuracy the likely spend a visitor will have for 50% of traffic in Latin America, which allows them to optimize spend by segmentation. In addition, unlike global OTAs that have relatively static pricing, Despegar has multiple additional levers it uses to optimize conversion vs. profitability for a given traveler such as: consumer facing service fees and installment terms. 

Koin

In Latin America, paying in installments is commonplace and has been so for more than 30 years. For context, 54% of ecommerce purchases in Brazil are currently paid for using an installment plan. In fact, installment payments are dominant in most of the markets Despegar operates in. These installment plans can be offered either through an independent non-card provider or through a credit card company where the consumer uses their available credit limit to spread payments over multiple billing cycles. In addition, many of these installment plans, like Boleto Parcelado in Brazil, offer the ability for consumers to make their installment payments in cash at a physical store location. As of 2022, 43% of transactions at Despegar were paid in installments. This is a meaningful differentiator to Booking.com who does not offer installment financing, and given that they operate primarily under the agency model in Latin America, would have a substantial amount of heavy lifting to do in order to become the merchant of record to provide financing solutions.  I believe it is an inevitability that Booking will eventually offer financing solutions in Latin America, but each year that it is not rolled out gives Despegar a leg up.  I also think you will see the global OTAs prioritize payment solutions in other developed markets before focusing on Latin America. This is already happening to some extent as we have seen Kayak (owned by Booking) partner with Uplift, Affirm, and Afterpay to offer installment options. Expedia also has an existing partnership with Affirm. However, these offerings are different in that they are generally presented as interest bearing loans, which you have to apply for, and most have failed thus far to gain traction. The closest comparable has been Agoda (owned by Booking) offering installment payments through Visa cards beginning in May 2022. In contrast, at this point Despegar has been providing installments for nearly 15 years, and they have over 150 payment options on their platform, including non-card options, across 20 different Latin American countries. To deepen its involvement in the payments space, Despegar acquired Koin, an installment provider already operating on its platform, in 2020. Koin provides non-card installment options that can either be paid in cash or online. This is an important customer acquisition channel, as credit card penetration across Latin America remains low, and even those that do have cards often have credit limits that are well below Despegar’s typical ASP. Notably, installments provided through Koin are the only area where Despgar takes credit risk. Koin has historically only operated in Brazil, but in 2023 expanded its installment services to Mexico. Koin processed $75m of transactions in 2022 and is expected to scale rapidly over the coming years as it expands its offerings to third-party merchants and continues its geographic roll out. In 2022 roughly 30% of transaction volumes were from third party merchants. Koin also offers payment gateway services, as well as anti fraud services, an expertise that Despegar developed since 2016. These services are available in Brazil, Mexico, Argentina, Colombia, and Peru. Despegar currently expects Koin to breakeven on an EBITDA basis by the end of 2023. 

Valuation

At an EV/Revenue multiple of 0.67x the midpoint of 2023 revenue guidance ($670m) and an EV/EBITDA multiple of 5x the midpoint of 2023 adj. EBITDA guidance ($90m), I believe that Despegar is one of the most attractively priced OTA assets globally. This is especially the case considering that guidance is based on a 90% travel recovery across Latin America in 2023, the adjusted EBITDA guidance includes $10-$20m losses from Koin, and guidance includes no M&A which has the capacity to be material given Despegar’s clean balance sheet. Below are a few public OTA comps which highlight the valuation discrepancy:

While it's certainly imperfect, I believe that revenue multiple is a reasonable metric for comps given that Despegar will be at a mid teens EBITDA margin this year and plans to be in the low 20s EBITDA margin range as travel volumes normalize to 100% of pre covid levels in 2024. Looking back over a decade, this comp set has a median EBITDA margin of ~20%, with Booking being the high outlier in the mid to high 30s %. The one real adjustment for Despegar would be that there would be some factoring expense associated with their installment sales in Brazil, which is not a factor in the other OTAs, which is in the range of 3-4% of EBITDA margin. On the other hand, if Koin scales successfully then it could easily offset this factoring expense and more. 

I believe the model below is conservative, the result is a share price of $11.32, or 105.8% upside to intrinsic value. This includes no M&A, which could drive a substantial amount of shareholder value.

Risks

• Latin America FX 

• Competitive pressures from Booking

• Failure to achieve operating leverage targets

Catalyst

- Continued FCF growth

- Takeout by Expedia or L Catterton