Introduction: eDreams, a frequent subject of my Substack articles, has executed a transformation from its original transaction-focused business model to a subscription-focused model. It grew Prime subscriptions from 0.3mm in Q1 2020 to 4.9mm as of August 22, 2023. What is most impressive about eDreams during this time, setting aside a year of COVID lock downs, is that it grew its subscription business in a profitable manner (using economic profits, but IFRS are catching up). eDreams’ stock price is up an impressive 66.1% YTD (as of 8/31/2023). Despite eDreams’ strong stock price performance this year, its current price is a fraction of my estimate of its intrinsic value.
Thanks for the article. I am still learning about the business model and would like to learn more about the basics on why they are winning market share and the value proposition for customers. After listening to the latest conference call management is cagey about churn and doesn't offer much about the benefits of the business model except for platitudes about NPS and delighting customers.
Too be clear, I own shares and looking to increase my position. Looks very interesting at these levels and just exploring bear cases.
I found this comment from NOLA18 on VIC interesting. Curious if you have any thoughts on it?
"However, I really struggle to square a few things here. It seems very clear to me that the actual prime savings claimed by eDreams are not real. For example, the snapshots below are using a French IP address and looking at flights on the eDreams website from Paris to Barcelona. The “prime only” member rate they claim as a ~25% discount to the normal fare, is actually usually only 1-2 dollars/euros off of the widely available fare. From a high level view this makes sense, because even in markets like Europe where flights are highly fragmented, you are talking maybe 5-7% margins. eDreams would be taking massive losses on every transaction if they actually were offering the kind of discounts claimed. You can change your IP address to dozens of different countries across Europe and search hundreds of flight pairs, and the results I come up with are the same, a difference of a few euros at best.
So with that as the starting point, you have a management that is hesitant to discuss churn, and claims that the majority of prime growth is via word of mouth. However, it seems obvious that the real reason, or at least a major reason, why Prime is growing is actually because for any transaction that occurs on eDreams, you have to opt out in the checking process not to get signed up for a membership. I know online reviews skew negative, but there are literally thousands of reviews out there with people saying they don’t know why they are being charged 59 euros a month. So with a business that likely does 8-10m transactions a year, and given the structure in checkout of being opted into prime, maybe the current growth isn’t all that surprising?"
Regarding churn, I think management doesn't want to give information away to competitors. That said, they often talk about how hard it is to build a subscription business. If it's so hard, what's the worry? I think that true churn is HSD, LDD. There is some churn from expired credit cards, but this is more of a timing issue. In Europe, you cannot contact a customer when a card expires, but you pick them back up the next time they book a trip. The way I get comfortable with it, is I look at their margins, which are inflecting up. If churn was an issue, they would have to buy more new subscribers, which would crush their margins.
Regarding the value prop, the more complex the flight the more value they provide. On hotels, take a look at my more recent article on it (Using Nick Sleeps Costco Analysis on eDreams), there's some good hotel comparisons in there. Also, know that there is a big service component to what they do, and that is probably as valuable as the costs savings.
Great write up! Any idea if the big players like Expedia or Booking will get in the flight booking business in Europe and take away the niche market share eDreams built.
Expedia has been in it for years and is the number 2 player. Edr is around twice their size. Booking has partnered with the number three player with a white label agreement through 2028. They are trying to buy the partner but euro regulators will likely kill the deal. There’s a recent podcast on yet another value podcast that firs into this a bit. Worth the listen.
It seems like gross bookings is falling YoY and not being disclosed, except for a footnote in the financials, whereas in past reports, when bookings was growing nicely, it was more readily disclosed. Is this a concern as bookings is also a leading indicator?
I don't think it is concern, although I wish they kept if for the time being. The economics of the business is now mostly driven by Prime, with 55% and 57% of the company's revenue and marginal profit coming from it. Also, they were pretty clean in the last two calls that bookings were down this Q. Net Prime adds probably a better indicator, and at 375k, that is healthy.
For what it is worth, I think that management was tired of the sell side and press being overly concerned with bookings.
Thanks for the article. I am still learning about the business model and would like to learn more about the basics on why they are winning market share and the value proposition for customers. After listening to the latest conference call management is cagey about churn and doesn't offer much about the benefits of the business model except for platitudes about NPS and delighting customers.
Too be clear, I own shares and looking to increase my position. Looks very interesting at these levels and just exploring bear cases.
I found this comment from NOLA18 on VIC interesting. Curious if you have any thoughts on it?
"However, I really struggle to square a few things here. It seems very clear to me that the actual prime savings claimed by eDreams are not real. For example, the snapshots below are using a French IP address and looking at flights on the eDreams website from Paris to Barcelona. The “prime only” member rate they claim as a ~25% discount to the normal fare, is actually usually only 1-2 dollars/euros off of the widely available fare. From a high level view this makes sense, because even in markets like Europe where flights are highly fragmented, you are talking maybe 5-7% margins. eDreams would be taking massive losses on every transaction if they actually were offering the kind of discounts claimed. You can change your IP address to dozens of different countries across Europe and search hundreds of flight pairs, and the results I come up with are the same, a difference of a few euros at best.
So with that as the starting point, you have a management that is hesitant to discuss churn, and claims that the majority of prime growth is via word of mouth. However, it seems obvious that the real reason, or at least a major reason, why Prime is growing is actually because for any transaction that occurs on eDreams, you have to opt out in the checking process not to get signed up for a membership. I know online reviews skew negative, but there are literally thousands of reviews out there with people saying they don’t know why they are being charged 59 euros a month. So with a business that likely does 8-10m transactions a year, and given the structure in checkout of being opted into prime, maybe the current growth isn’t all that surprising?"
Regarding churn, I think management doesn't want to give information away to competitors. That said, they often talk about how hard it is to build a subscription business. If it's so hard, what's the worry? I think that true churn is HSD, LDD. There is some churn from expired credit cards, but this is more of a timing issue. In Europe, you cannot contact a customer when a card expires, but you pick them back up the next time they book a trip. The way I get comfortable with it, is I look at their margins, which are inflecting up. If churn was an issue, they would have to buy more new subscribers, which would crush their margins.
Regarding the value prop, the more complex the flight the more value they provide. On hotels, take a look at my more recent article on it (Using Nick Sleeps Costco Analysis on eDreams), there's some good hotel comparisons in there. Also, know that there is a big service component to what they do, and that is probably as valuable as the costs savings.
Great write up! Any idea if the big players like Expedia or Booking will get in the flight booking business in Europe and take away the niche market share eDreams built.
Expedia has been in it for years and is the number 2 player. Edr is around twice their size. Booking has partnered with the number three player with a white label agreement through 2028. They are trying to buy the partner but euro regulators will likely kill the deal. There’s a recent podcast on yet another value podcast that firs into this a bit. Worth the listen.
https://www.yetanothervalueblog.com/p/ave-maria-focused-funds-chadd-garcia?utm_campaign=post&utm_medium=web
It seems like gross bookings is falling YoY and not being disclosed, except for a footnote in the financials, whereas in past reports, when bookings was growing nicely, it was more readily disclosed. Is this a concern as bookings is also a leading indicator?
I don't think it is concern, although I wish they kept if for the time being. The economics of the business is now mostly driven by Prime, with 55% and 57% of the company's revenue and marginal profit coming from it. Also, they were pretty clean in the last two calls that bookings were down this Q. Net Prime adds probably a better indicator, and at 375k, that is healthy.
For what it is worth, I think that management was tired of the sell side and press being overly concerned with bookings.