Mondee Holdings (NASDAQ:MOND) has underperformed in 2023 and stock prices are down by about 33%. In this article, I have tried to evaluate the Pros and Cons of buying this stock at its current level. Based on my conclusion, Mondee has strong revenue momentum driven by improving travel patterns post pandemic and the launch of its AI marketplace, expectations of market share gain, take rate expansion, operating leverage, Fintech products and accretive M&A inorganic growth. On the flip side, there is negative EPS, high payment for interest expenses, negative shareholders equity as well as unlevered free cash flow. Although Mondee is showing strong growth momentum, investors should watch the flip side as well before investing.
Established in 2011, Mondee is a travel technology company and a modern travel marketplace with its headquarters based in Austin, Texas.
Pros of Buying Mondee Stock
Accelerated Growth Despite Slower Market Recovery in International Travel
Mondee generates transactional revenue through airline ticket sales, which includes mark-up fees and commissions from the sale of products such as travel insurance, seats, and bags. In Q2-2023, revenue increased to $56.8 million, an increase of 124% Y/Y, while the take rate increased to 8.0% from 7.2% during the same period. Take rate is an important metric for the marketplace, which signifies the percentage charged as fees for the overall transaction. Mondee has improved the take rate by 80bps which is positive for the company. Also, management is expecting to increase take rate to double digits once international travel recovery reaches 100%. In Q2-2023, North American domestic air fully recovered to 2019 levels whereas international travel recovered only 88% due to China reopening for in-bound travel in early 2023. Furthermore, expectations of extreme inflation and recession fears are also abating. In H2-2023, a more normal travel environment is expected by the industry in which Mondee continues to thrive. Moreover, on the supply side, the growth is expected to expand with additions of the airline fleet and hotel property. For example, Air India Airline and United’s Airline recent purchase of hundreds of new aircraft and Hilton’s brand additions will increase the overall growth of the travel industry.
Annual gross revenue increased to $2.2 billion in FY-2022 with a CAGR increase of 118% between 2020-2022, while ARPT increased to $75 from $65 over the same period. Mondee has shown tremendous growth in gross revenue due to improvement in travel relaxation. The increase in revenue was due to inorganic growth from the acquisitions of Orinter, Interep and Consolid during 2023. Moreover, significant improvement in travel demand was noticed in H1-2023. Mondee has been executing and maximizing value through M&A, regardless of market conditions, since its foundational year in 2011. In terms of revenue, management is expecting revenue at $248 million in FY-2023, an increase of 55% over FY-2022 and 30%+ revenue growth in the long-term, indicating continuous growth momentum.
The largest travel purchasing and influence is now represented by Gen Zs and Millennials. To meet this demand, Mondee launched the first fully integrated AI Travel Marketplace. This will be helpful in expanding the target audience and being accessible by social travel influencers and freelancers as well as the tech-savvy Millennial and Gen Z travelers. Mondee expects the AI marketplace to increase market share and enhance growth over time. With a gross revenue total addressable market of $1 trillion, Mondee is well positioned in the current macro environment with 80% North America outbound international travel, mostly leisure and fully integrated AI Travel Marketplace.
In nutshell, Mondee has shown solid growth from 2019 in terms of gross revenue and take rate. Moreover, management is expecting strong growth in revenue and take rate in FY-2023. I believe investors should consider the resilience of the business model for generating a positive growth rate in a difficult business environment post pandemic and future possibilities through AI Travel Marketplace.
Driving Towards Growing Profitability
There have been continuous improvements in Mondee’s business and operating position since the outset of the COVID-19 pandemic. Mondee has successfully managed the cost and improved margin in an environment of high inflation. Moreover, industry wide labor shortages are abating and expected to return to normal levels in H2- 2023, which impacted air and hotel supply as well as prices in H1-2023. I support my investment thesis only if revenue growth translates into better operational efficiency, which is the case with Mondee.
From negative Adjusted EBITDA margin, Mondee has shown a strong improvement in margins. In FY-2022, Adjusted EBITDA margin increased to 7% and management estimated 11% for FY-2023, an increase of 400bps. The below chart helps investors to understand the improvement in cost structure and its impact on margin.
The cash based operating expenses (as % of revenue) were reduced to 101% in FY-2022 compared to 154% in FY-2020. Furthermore, management is estimating 30%+ margin as part of a long-term strategy. In nutshell, Mondee has a solid trend for margin improvement driven by market share gain, take rate expansion and operating leverage.
Rule of 40 indicates healthy SaaS companies, if the growth rate is added to the profit margin, the combined value should typically exceed 40%. In the case of Mondee, it’s not only greater than 40% but also outperformed the peers. I believe with the introduction of the AI marketplace, Mondee will be able to accelerate revenue growth, leading to investment opportunities.
Cons of Buying Mondee Stock
In Q2-2023, the total cash balance was $58 million, $153 million debt and shareholder’s deficit of $34 million. The shareholders deficit is negative due to an accumulated deficit of $307 million. Theoretically, negative shareholder equity could be a warning sign that a company is in financial distress. With the projected increase in revenue and cost control measures, the accumulated deficit may decrease. However, the utmost consideration for costs is needed to manage earnings in my view.
Mondee has total debt of $153 million and paid interest of $8.4 million in Q2-2023. In the above chart, we can see how negatively interest expenses impact net income. The EPS has been reduced to negative $0.22 compared to $0.03 in Q2-2022. Investors should watch the level of debt and the impact of interest on the bottom line for any investment decision.
Another metric is Unlevered Free Cash Flow which is negative $4.4 million in Q2-2023, an improvement of $0.4 million compared to Q2-2023.
Mondee has launched an AI marketplace and investors should watch the impact on revenue growth in the future.
In Q2-2023, North American domestic air ~101% recovered to 2019 levels, international only ~88%. Any new Covid variant could impact the travel relaxation and impact the revenue growth of Mondee.
Investors need to consider the levels of debt, improvement in EPS, free cash flow and shareholders’ equity. Further deterioration in these metrics could severely impact the investment.
The key investor takeaway is that Mondee is a good company in the travel industry with robust historical revenue growth and projected growth. It is poised to outperform due to performance of key metrics like gross revenue and take rate, EBITDA margin expansion, better management of cost structure, inorganic growth and market share gain through the launch of the new AI marketplace in Q2-2023. However, investors have to watch closely the impact of any emerging COVID variant on revenue growth. In addition, the investor should keep a close eye on the level of debt, improvement in EPS, free cash flow and shareholders’ equity. In a nutshell, risk-averse investors should stay away until the Cons highlighted above show improvement.