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The following segment was excerpted from this fund letter.
eDreams ODIGEO (OTC:EDDRF)
European investors are a pessimistic bunch. For anyone paying attention, there is a significant resurgence in travel on the horizon when examining incoming data as well as commentary being echoed by many public company executives. These include in part the management teams for Priceline, Booking (BKNG), Expedia (EXPE) and even Target (TGT) where CEO Brian Cornell explained on the company’s last conference call that luggage was their fastest growing product category this year.
Airlines and hotels also speak about the recovering demand picture. With travel related stocks hit hard this year given higher oil prices, inflation and talks of a pending recession, one must wonder when the demand picture will register with the market. Especially when considering a portion of the increased demand should accrue to the leading player in European flights.
I believe eDreams remains mispriced. I also believe the company’s subscription loyalty program, Prime, continues to provide a significant operational leg-up in the form of increasing eDream’s share of direct bookings, reducing customer acquisition costs and accelerating revenue growth. It’s telling that none of eDreams peers have attempted to replicate Prime, despite talks about developing stickiness with travel customers, reducing dependence on Google and attempting to more efficiently leverage marketing spend.
In fact, as recently as June, Expedia CEO Peter Kern mentioned these very dynamics and pointed to the lack of ‘great products that are sticky, that keep people coming back, that keep people in your loyalty framework…’ Yet, Expedia’s solution to that problem was to develop a price tracking tool. As a result, it remains puzzling to me how the share price of a differentiated, leisure focused OTA with a fast-growing subscription loyalty program – addressing this very problem – can be hit the hardest this year. So why would we want to own eDreams?
Starting around 2015, eDreams management laid out a multi-year strategic plan for which they’ve exceeded nearly all expectations on their way to significant revenue and EBITDA growth. Although it may take time for customers to return to booking higher margin long-haul flights, eDreams continues to lead the market in European flight bookings, has already surpassed their pre-COVID bookings numbers, and is ahead of the industry by hundreds of basis points.
Furthermore, Prime continues to exceed all growth expectations – even internal ones – having reached over 3.0 million members at the time of this writing. As a reminder, Prime serves two main purposes: it saves customers money on repeat bookings, and significantly reduces eDreams CAC via direct bookings by lowering their dependence on Google and metasearch platforms. If this dynamic persists, it will have the effect of improving margins and ARPU as the Prime share of revenue increases over time.
A recent debt refinance and capital raise during FY22 means that eDreams has little dependence on the capital markets from here, and continued improvement in both travel and consumer sentiment should have drastic positive effects on the business and investment case. The COVID pandemic provided a big step back for all things travel, but as demand continues to recover and Prime subscription revenue grows, there is a path to eDreams being able to generate between $120 million and $180 million in cash EBITDA within the next few years.
The current market cap is below $800 million. So, what is the leading flight OTA in Europe with some of the strongest brands, largest customer base, and the only recurring revenue subscription travel program in the industry worth? I don’t have an exact price target for eDreams, but I’m confident fair value is not €4.50/share.
In March 2020, eDreams stock bottomed at less than 3.5x 2019 EBITDA. I don’t believe the outlook could have been more concerning than it was at the time. The business has also improved significantly since. A similar multiple on next year’s EBITDA would yield a share price not too far below today’s valuation. I think the prospect of additional negative news is priced in and continue to believe eDreams shares could conservatively be worth more than triple today’s price within a few years, indicating a very favorable risk/reward setup.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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