As a whole, the world is traveling more these days. That helps explain the growth and popularity of America's top two online travel agency (OTA) stocks, Expedia (EXPE 4.67%) and Priceline Group (BKNG 2.97%).
Despegar.com, which is going public within days, says in its IPO prospectus that it's the top OTA in its home region of Latin America. That may be true, but will it be a good stock to own?
Think of Despegar.com as the Expedia or Priceline of South America. In fact, Expedia is a major shareholder in the company, owning a pre-IPO stake of over 16%. Expedia is also the exclusive provider of Despegar.com's non-Latin America hotel bookings, and the "preferred" provider within the region.
Despegar.com has a commanding presence in its part of the world. According to the company, it covers 20 markets in the region, which collectively are home to 95% of the Latin American population. The company operates a pair of brands -- Despegar, which covers its global offerings, and Decolar, specific to the Brazilian market.
Like much of the world's travel industry, the Latin American market is fragmented across all major segments, according to Despegar. Pulling together these disparate offerings into two sprawling Web portals has made the company the important regional player that it is.
It's grown robustly of late, thanks largely to a sharp uptick in bookings. In the first six months of this year, revenue rose by almost 30% to $248 million, on gross bookings that were nearly 50% higher at $2.1 billion. Expenses grew more slowly, and as a result Despegar.com flipped from a slight loss in the first half of 2016 to a nearly $19 million profit in the same period this year.
The company attributed the boost in bookings to "stabilizing macroeconomic conditions" in Brazil and Argentina, two of its most important national markets. Optimistic forecasts have it that such countries will continue to improve. This, combined with still-low internet penetration across Latin America, should enlarge the customer base substantially.
Despegar.com quoted Euromonitor estimates for the region's travel industry for growth of around 34% from 2016 to 2020. In the latter year, it should total just under $131 billion.
This Fool's take
Those estimates might be a bit rosy. However, it's clear that Latin America as a whole is on the way up economically. And the richer a region becomes, the more dosh its citizens will have for non-essential items like travel. So current trends favor Despegar.com.
Interestingly, the company might end up being a takeover play for its big American partner. As part of their collaboration agreement, Expedia has pledged not to acquire more than one-third of the voting power of the Latin American company's shares within three years of the IPO -- unless it places a bid for over 75% of said shares. Given Expedia's size and its appetite for acquisitions, this could occur once the grace period is over.
We don't yet have analyst projections for Despegar.com's forward profitability. If we divide the midpoint of the anticipated IPO price by the most recent fiscal year's per-share earnings, though, the South American OTA's P/E is around 94. Meanwhile, the trailing-12-month figures for Expedia and Priceline are 69 and 40, respectively.
Perhaps its position as a monster player in a potentially hot-growing region is enough to justify such a premium, but to me the difference is awfully big. Although I like the company, I think those aiming to invest in the big OTA space might be better off opening or adding to positions in Expedia or Priceline instead.
Just under 12.8 million shares are to be sold in Despegar.com's IPO, at a price of $23 to $26 apiece. The stock will be traded on the New York Stock Exchange under the ticker symbol DESP. It is slated to begin trading on Wednesday, Sept. 20.
The joint managers of the IPO are Morgan Stanley and Citigroup, and the underwriting syndicate includes UBS Investment Bank and Cowen.