Despegar.Com: Strong Earnings Recovery And Brazilian Growth Encouraging (NYSE:DESP)

Investment Thesis: I take a bullish view on Despegar.com, given strong recovery in earnings and vibrant growth across the Brazilian market.

In a previous article back in July 2022, I made the argument that Despegar.com (NYSE:DESP) has been seeing a significant rebound in revenue, but low growth in cash and earnings levels make the stock too risky at this point in time.

Since then, the stock has ascended slightly to a price of $7.91 at the time of writing – after having seen downside in the interim:

However, we can see that the stock is still trading at significantly lower levels than those seen two years previously. The purpose of this article is to assess whether Despegar.com has the ability to see continued growth from here, taking recent performance into consideration.

Performance

When looking at the most recent earnings results for Despegar.com, we can see that earnings per share has rebounded into positive territory, up to $0.25 per share for 2Q23 from a loss of -$0.26 per share in 2Q22.

It is notable that when comparing gross bookings on an FX neutral basis for Q2 2022 and Q2 2023 – we can see that while gross bookings for Mexico have seen a slight decline – that of Brazil and the rest of Latin America have seen a strong increase – Brazil in particular having shown a substantial rise.

In this regard, the Brazilian market has greatly increased in importance over the past year, and the growth was particularly driven by that of Packages and Hotel Transactions – which increased by 79% and 53% year-on-year respectively. The Packages, Hotels and Other Travel Products segment as a whole had seen an increase by 27% from Q2 2022.

From a balance sheet standpoint, Despegar.com has managed to significantly decrease its long-term debt over the past quarter – from $3.433 million in March 2023 to $2.734 million in June 2023.

The long-term debt to total assets ratio is also very low – indicating that the company is not reliant on long-term debt to finance its asset base. The ratio has also decreased over the period:

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Source: Figures sourced from Despegar.com 2Q23 Financial Results (in thousands of U.S. dollars, except the long-term debt to total assets ratio). Long-term debt to total assets ratio calculated by author.

In addition, the quick ratio of Despegar.com (calculated as cash and cash equivalents plus accounts receivable all over total current liabilities) remains below 1 but has seen a slight increase over the past quarter.

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Source: Figures sourced from Despegar.com 2Q23 Financial Results (in thousands of U.S. dollars, except the quick ratio). Quick ratio calculated by author.

A quick ratio below 1 indicates that the company does not have sufficient liquid assets to meet its current liabilities. However, I take the view that with the company’s long-term debt to total assets ratio remaining very low, along with earnings having strongly rebounded – the company is in a good position to also increase its short-term liquidity over time.

My Perspective

As regards my take on the above results and the implications for the growth trajectory of the stock going forward, the company’s rebound of earnings into positive territory as compared to last year is quite encouraging.

This has been driven in significant part by growth across the Packages, Hotels and Other Travel Products segment – and the fact that we are seeing significant growth across the Brazilian market is quite welcoming.

With the summer season now approaching in the Southern Hemisphere – I take the view that Despegar.com could be in a good position to see further growth across the region in the latter half of this year as the volume of international visitors increases. Moreover, Brazil benefits from a strong domestic travel market, with LATAM Airlines (OTCPK:LTMAY) reporting that for the first quarter ending March of this year – the company’s domestic operations had increased by 19.8% as compared to 2022.

I take the view that with both domestic and international tourism having seen a strong recovery heading into 2023 – the upcoming high season is set to see strong demand as well.

The company’s reduction in long-term debt is highly encouraging, as it indicates that Despegar.com is not dependent on using debt to fund the rebound in growth that we have been seeing.

Risks

In terms of the potential risks to Despegar.com at this time, investor expectations for the stock are likely to be higher than that of this time last year – given the recovery in the Brazilian market as well as the recovery in earnings for the company more broadly.

Specifically, the company’s 2023 annual guidance is $640 million to $700 million for revenue, with $80 million to $100 million in adjusted EBITDA.

Should the company fail to meet these targets for the year as a whole, then we could see growth in the stock subside.

From a macroeconomic perspective, a slowdown in economic growth across Brazil could also be of concern for Despegar.com. According to the International Monetary Fund, growth across Brazil is expected to slow from a projected 2.1% in 2023 to a projected 1.2% in 2024. Should we see a slowdown in growth coincide with lower travel demand across the region – then this could affect growth in gross bookings for Despegar.com as a whole.

Conclusion

To conclude, Despegar.com is not without risk – given its exposure to emerging markets.

With that being said, the recent recovery in earnings as well as growth across the Brazilian region has been quite impressive. I take the view that if the current trajectory continues – then the stock could plausibly see upside to prior highs in the $12-16 range, as we saw following the post-COVID recovery for 2021.

Notwithstanding the risks, I now take a bullish view on Despegar.com in light of recent performance.