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Why Despegar Jumped 11% in August

By Andrew Tseng – Sep 8, 2020 at 3:29PM

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Travel in Latin America has been crushed, but the recent trend is looking up.

Shares of Despegar (DESP -5.27%) jumped 10.9% in August, according to data from S&P Global Market Intelligence. For context, the stock's August bounce still left it down 37% for the year as of the end of August. 

What happened

Despegar, Latin America's largest online travel agency, reported its second-quarter financial results on August 21. Not surprisingly, business conditions were awful for the company due to COVID-19.

Gross bookings fell 96% year over year, while revenue actually came in at negative $9.7 million as a result of cancellations. It's not often you see a company report negative revenue.

A woman walks through the airport with a rolling suitcase.

Image source: Getty Images.

Transactions on the company's platform fell 92% year over year while room nights fell 91%.

On the bright side, the company was successful in reducing its cost structure, achieving a 32% year-over-year reduction in structural costs. That surpassed the target management set forth on its first quarter-earnings conference call.

Despegar also achieved two equity raises. It sold $50 million of Series B convertible preferred stock to Waha Capital, and sold $150 million of non-convertible preferred stock and warrants to L Catterton.

On August 20, Despegar acquired an 84% equity stake in Koin, an online payments platform in Brazil. The company said this acquisition would "enhance customer financing options" provided by Despegar.

So what

Clearly, Despegar is going through some brutally difficult business conditions with the spread of COVID-19 in Latin America. But the company saw a positive trend in bookings in both June and July, and that trend continued into the first two weeks of August. 

Despegar has a favorable position as the largest online travel agent in Latin America, and COVID-19 is unlikely to be a permanent problem. A year or two from now, hopefully with the help of a safe and effective vaccine for COVID-19, Latin American consumers' willingness to travel could be meaningfully higher than it is today.

Now what

Fortunately, Despegar is well-capitalized with $224 million of cash and no debt as of June 30. But the two equity raises that occured after the end of June put another $200 million of cash on the books, bringing the total war chest to $424 million, all else being equal. Investors should expect the company's strong balance sheet to help it endure this difficult period and be well positioned for a post-COVID world.

Andrew Tseng has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Despegar.com, Corp. Stock Quote
Despegar.com, Corp.
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