We're approaching the one-year anniversary of Despegar.com's (DESP +0.00%) IPO, and it's fair to say that shareholders would prefer to see this marriage annulled. Latin America's leading online travel site operator has shed more than half of its value since peaking in March, and it's kicking off this new trading week with its stock hitting another fresh low on Monday.
Despegar.com wasn't a scorcher when it went public at $26 in mid-September of last year, but it wasn't a disappointment. The stock opened at $29 on its first day of trading, and by March of this year, the shares were trading as high as $36.56. The last few months have been brutal, with the stock in a swift and steady descent. Despegar.com now finds itself waffling about in the mid-teens. Let's go over the reasons why the market isn't boarding this once promising travel portal.
Image source: Despegar.com.
1. Slow growth is a deal breaker
Investors aren't shying away from travel sites or even Latin American dot-coms as long as growth is strong. Despegar.com hasn't lived up to those expectations. Revenue grew just 4% in its latest quarter, half the growth that Wall Street pros were targeting.
We knew going ahead of last year's IPO that top-line moves were going to be lumpy. Revenue had declined slightly in 2016 before bouncing back in 2017. Revenue had actually topped 20% for five consecutive quarters before buckling in this year's second quarter.
2. Travel trends aren't very flattering
Investors buying into growth industries leaning on Brazil -- Despegar's largest market, accounting for 42% of its revenue -- and Argentina have come to live with the wild currency fluctuations, but there are underlying trends at Despegar.com that are also proving to be a pressure point for investors. Despegar pointed out in its second-quarter earnings call that average selling prices are declining in Argentina even at the local-currency level as the bookings shift away from high-margin international ticketing and to the lower-margin realm of domestic travel. Plummeting currencies in Argentina and other Latin American countries are a huge factor keeping locals vacationing closer to home, where they can get more bang for their diminishing buck.
This all culminates in a problematic bottom line, with the out-of-favor dot-com earning less than half of what it earned a year earlier. Despegar fell short of analyst profit expectations for the second quarter. It had beaten Wall Street targets in its three previous reports.
3. Regaining growth won't come cheap
One of the stock's price target downgrades last week came from Brian Nowak at Morgan Stanley, lowering his price goal to $22 from $24 while sticking to his neutral equal-weight rating on the shares. Nowak argues that Despegar.com will have to invest in order to return to double-digit revenue growth, and that's going to weigh on the company's already challenging margins.
Investors clamoring for stability also didn't like hearing that its CFO was leaving the company for a noncompeting job to be closer to his stateside family. He stepped down two weeks ago but is taking a seat on the company's board of directors, so it's not as if he's totally distancing himself from Despegar.com.
The long-term prospects remain somewhat encouraging for Despegar, and the sharp sell-off since its springtime peak makes it a compelling value here. Investors may want to wait until revenue growth or margins improve before hopping aboard. It's a pretty turbulent flight right now.
