Expect This Stock to Take Off
Despegar.com (NYSE: DESP), our latest portfolio addition, is a leading Spanish language online travel agency, headquartered in Argentina. It has been nicknamed as the “Expedia of Latin America.” Expedia also owns roughly 14% of Despegar and has been speculated as a potential buyer of the company.
Although Despegar, whose name in Spanish means to “to take off,” became a public company last year, it has been in existence since 1999. It has nearly two decades of experience in the Latin America (spanning Mexico and the entire South America). The experience matters because although we may think of Latin America as one bloc, within the region itself each country has unique laws, rules, and cultures. It takes local expertise to deliver satisfactory service to its customers.
The company operates across 20 markets in Latin America and offers a suite of travel products such as airfare, hotel bookings, travel packages and other travel products.
Favorable Conditions
Today people are traveling more than ever. At the same time, an increasingly number of people are booking their trips online. As a result, the online travel market is growing faster than the overall travel market. More and more people will be planning and paying for their trips over the internet. The online travel market in Latin America in particular was estimated to be $30 billion as of 2016. During that year, travelers booked $3.3 billion worth of spending through Despegar, or 11% of that $30 billion.
By 2020, the Latin American online travel market is expected to grow to $48 billion, a rate of about 12.5% per year. That means if Despegar merely maintained its 11% share, by 2020 its booking activity will increase to $5.3 billion.
Of course, the bulk of the bookings go in the pockets of the suppliers (e.g., airlines and hotels), while Despegar collects a slice of the pie. For example, of the $3.3 billion in gross bookings that went through Despegar in 2016, $411.2 million (about 12%) went to the company as revenue. The company is scheduled to report fourth-quarter and full-year results in mid-February. Full-year revenue is expected to be roughly $515 million, representing 25% growth.
Room for Growth
Since online travel booking still has low penetration in Latin America, there’s room to grow. In the U.S., roughly half of travel spending (counting airfare, lodging, attractions, and car rentals) is made online; in Latin America the percentage is only 30.
Furthermore, it’s estimated that only a little over half of the population in Latin America uses the Internet now. By 2020 the percentage is expected to increase to 66%. More internet users mean more people will book their trips online. Other favorable trends include a relatively fast real GDP growth of about 2.6% per year through 2021 and wider usage of credit cards. These trends matter because people are more likely to travel when their income rises, and customers have to pay electronically when they make purchases online.
The Latin American airline and hotel industries tend to be more fragmented when compared to those in the U.S. This creates an opportunity for Despegar to work with suppliers as the middleman to connect customers to these suppliers.
Wide Selections
As of the end of September 2016, Despegar offers products from more than 250 airlines, 900 car rentals, 200 bus carriers and 300,000 hotels. It also offers customers the option to pay in installments—about half of transactions are made this way.
According to the company’s January presentation, through the first three quarters of 2017, more than 3.6 million customers had booked trips on its website or mobile app, a 19% increase on a year-over-year basis.
Through the first nine months of 2017, Despegar had processed 6.6 million transactions, up 28% compared to a year ago. And in dollar terms, the transactions totaled $3.2 billion, up 41% year-over-year.
As noted earlier, the company will report fourth-quarter and full-year results soon and will provide a fuller picture of how quickly online booking activity is growing.
Positioned as the leading online travel agent amidst these favorable trends, the opportunity is there for Despegar to seize. Clearly, Tiger Global is banking on Despegar to become a lot bigger than it is today.
Being a mid-cap foreign stock without a lot of analyst coverage and relatively thin daily trading volume, DESP will probably have its share of ups and downs, so be prepared for some occasional sharp price movements. However, we fully expect the share price to significantly rise over time as the company continues to grow and the stock receives wider recognition in the U.S.
Our initial suggested buy-up-to price is $35.
Stock Talk
Pat C.
Really! What a highlight! Down 15% from the high of $32.86 1/29/2018. Annualized that’s about -180%. Down that much from the high is a sell signal in many trading strategies. That big of a negative swing sometimes says you are wrong. Are you sure this is worth holding going into earnings. It looks like a set up for a big disappointment.
If this is your highlight how much confidence should readers put in your selections?
Scott Chan
Dear Pat,
The strategy of our publication is to follow the lead of very successful fund managers. These guys have the money and resources to find out everything they can about a company before betting millions of dollars on the stock. They aren’t right all the time, but the idea is that they are right more often than not, and we can ride their coat tails on their high conviction buys. There’s no doubt that in the case of Despegar it is a very high conviction bet made by Chase Coleman III (of Tiger Global).
As noted in this article, the stock will likely continue to have its ups and downs. That’s just the nature of a stock like DESP. We’ve already explained why Tiger Global and we like the stock.
Can we promise the stock won’t fall big after earnings? No. We don’t have insider info on what the results and guidance are. But, a stock that’s falling as earnings approach doesn’t automatically mean it will fall more after earnings. It just means the market’s expectation is falling as earnings approaches.
Quarterly earnings can and do cause sizeable swings up or down in stocks. But it’s important to separate fundamentals that affects a company’s long-term outlook from temporary factors that impacted short-term results. Thus, as noted in the article we are looking forward to seeing more details from the company.
Please note Brain Trust Profits isn’t a trading publication in and out of positions in days or weeks. Our average holding period for past trades has been about one year. We monitor what our reference funds are doing with their holdings and their moves are a key factor in determining what we do with the stock in this publication.
Pat C.
Interesting. Only a few days ago on Jan. 29 you were touting your record of stocks you bought and sold in 2016 and 2017 with an average holding period of only 101 days; “less than a 1/3 of a year” I believe you wrote. Only one of the eight stocks was over 100 days and the shortest was only 18 days. So do you sometimes trade in days or weeks? And if your average holding is more than a year, does that mean 2016 and 2017 weren’t average years? I’m confused. Maybe you should ask your marketing department not to create expectations it is impossible to meet.
Scott Chan
Pat,
The average holding period since inception of Brain Trust Profits (2012) IS nearly a full calendar year.
The average holding period of the stocks that were bought and sold in 2016 and bought and sold in 2017, IS 101 days.
As I said in my response to you in January: “Because the strategy is to follow fund managers, we do not have a set holding period target. They can vary by a lot trade to trade.”
Within a given period, the average holding period is not going to be the same. That’s just reality.
The fact is DESP has been in the portfolio for 12 days (since January 26). As of today’s closing, at $29.50 it is down 5.1% from our entry price of $31.10. The S&P 500 since January 26 is down 5.4%. DESP hasn’t managed to miraculously make gains during the period but it hasn’t been a disaster either.
That peak price you cite is the very top of a brief and anomalous intraday spike on Jan 29. The stock traded over $32 for only like 20 minutes.
Even a rock solid stock like Apple is down 11.4% from its intraday high. It’s important not to overreact.
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