Revisiting eDreams After Q2 Print – Prime is Working, What’s the Endgame?
It’s an interesting time to take a look at eDreams. In the last two months, we had an outstanding Q2 print, which shows the Prime subscription strategy is working. We had some of the private equity overhang issue solved. Yet despite these two positive events, the stock price has gotten pummeled – perhaps there was some PE front running, and it is certainly getting hit with some tax-loss selling.
Revenue Up 39% YoY
Cash EBITDA up 26%
EBITDA Margins at 13%, up from 9% last quarter
Note that much of the Prime investments flows through the income statement. EBITDA Margins would likely be in the high 20s, low 30s without the Prime growth investments
Bookings growth averaged 46% above 2019 for July through mid-November
Prime grew ~400k net members to 3.6M by the end of the quarter.
Operationally, all is going well. Prime is growing, bookings are strong, margins are starting to reflect the Prime transition, despite being burdened with the Prime investments. In the back half of the year, cash should start raining in, as there should be a high level of subs having a one-year anniversary.
Subsequently, there were two interesting events. First, it was reported that the European Commission is going to take a hard look at Booking Holding’s announced acquisition of Etraveli Group. Second, it was announced that Ardian, a large private equity owner of eDreams, had sold its stake, as its fund’s life had reached its end. Ardian sold its position to two firms. First, Polus Capital, formerly known as Brybrook Capital, is a long-time investor in eDreams. The second buyer was Conversant Capital, a US-based investor who is a recent eDreams investor, but has an expertise in the hospitality space.
The Next Couple of Years
Management laid out their FY25 goal of 7.25M Prime Subs by the end of FY25, which they expect to result in €180M in EBITDA that year. Note, there are still ample growth expenses that are burdening this EBITDA target, so growth can be strong beyond FY25. This EBITDA target seems achievable. They are on pace to deliver just over €80M in FY23. I believe they will be around €120M in FY24, which should set them up well to hit their FY25 target. A slide from the last earnings call should provide some comfort on the viability of this target. France, their strongest Prime market, only has a 3.8% penetration rate, and the growth in that market is still accelerating. Just getting the 9 other Prime markets (ex US) up to France’s penetration level will get them to their FY25 7.25M subs goal, and this is without introducing new Prime markets. This seems reasonable as they have a 5% market share in flights in Europe and Prime saves customers money, which is important given the European macro picture.
Financially, I have them ending FY23 delivering just over €80M in EBITDA, €120M in FY24, and €180M in FY25. What does that mean to the stock price if they hit these targets? Well, AirBnB is trading for 15x NTM EBITDA. It is growing nicely, perhaps not as fast eDreams, but it does not have the sticky revenue of characteristics of a subscription program. Putting a 15x multiple on FY25E EBITDA and discounting it back to today yields an implied price of €17.08 for eDreams. Giving eDreams a 20x multiple given its stickier, and perhaps faster growing, revenue yields an implied price of €26.54. Achieving either of these prices would be a homerun versus the current price of €3.60, but as my old boss was found of saying, “It’s a long way from the cup to the lip”. How is eDreams going to get there, or better yet, what reverses the horrendous sentiment in the stock?
First and foremost, there is continued operational execution. Let’s presuppose that the company will hit its FY25 Goals.
Financial Statements. Cash EBITDA is the right way to look at this company, that said, EBITDA and IFRS Net Income are lagging the Cash EBITDA growth, which is causing the company to screen poorly. It should screen much better in the coming two quarters, which may help it get more attention from new investors.
Enhanced Equity Research Coverage. Given that eDreams has the largest and fastest growing subscription program in travel, it would not surprise me if the sell-side picks up on this and we see new initiations of coverage from marquee firms, who appreciate the subscription model of eDreams.
Share Repurchases. The company will need to repay the €3.8M of Spanish Government Debt that is leftover from COVID before it can repurchase any shares. The government loan is cheap debt, and I assume the plan was to keep it on the balance sheet as long as possible. That said, given the discrepancy between today’s price and eDreams’ intrinsic value, just paying off the loan and starting to repurchase shares immediately makes a lot of sense.
New Board Members. The Ardian sale leave two vacant board seats. It would be nice to see some new board members who have deep capital markets experience. The operational execution of the company has been great; however, there is some room for improvement in the capital markets department.
With pressure from tax loss selling removed in a week, a low-liquid liquidity stock like eDreams can re-rate quickly - particularly if management begins to repurchase shares.
I’ll begin with the following, the earlier mentioned intrinsic value estimate range of €17.00 to €27.00 per share, is my view of the current value. It would not surprise me if a few years out, the intrinsic value continues to grow, as eDreams free cash flow per share continues to compound. I want to own this for a long time. One of the long-term catalysts, would put an end to this, as one of the catalysts is a sale. I want to own this for a long time and benefit from the compounding. However, a sale is a realistic option.
Removal of All PE Overhang/Increased Liquidity. With Ardian now gone, that leaves Permira with ~26% of the stock. Permira has placed eDreams in a continuation vehicle. That gives them several years left with this investment. I think their carry kicks in around €11 per share, so they will not want to sell too much of eDreams below that. I can see them begin to monetize their position around that price. This should not cause too much of a concern, as if the Ardian sale proves anything, is that there is demand for this stock in size. I hear that there are other interested large institutions who want in, but liquidity is the issue. Chipping away at Permira’s stake should increase liquidity and allow more new investors to own eDreams in size.
Hotels. You can book hotels on eDreams presently. That said, they are working on getting the tech right before launching a big push into hotels. I see a this push coming in the next 6-8 months. Note, success with this is not in the current estimates.
Launch of New Prime Markets. Prime has limited functionality outside of the core, European markets. I can more full functioning markets launch soon – they had job positions posted on LinkedIn for the US earlier this year.
Re-listing. This will take some time, and thus far, the company has been reluctant to do this, that said, re-listing in the US, a market with an investor base that likes travel companies and understands subscription businesses, could cause a material re-rating.
Sale of Business. Like I said, I hope this does not happen, but if it did, who are the possible buyers? The recent news regarding the scrutiny around the announced Booking and Etraveli transaction is probablyan indicator that Booking would not be a likely acquiror. Who else does that leave?
Tripadvisor. They say if you want to judge if a business has a moat, look for the bodies of dead competitors. Tripadvisor is not dead, but its subscription program died a quick death. This should give an indication of the difficulty of establishing a subscription program in travel. While Trip’s subscription program is dead, the company still has an identity crisis. Is its business model just marketing for Booking and Expedia? Can it capture bookings given its position near the top of the funnel? Given Trip’s relative size compared to eDreams and its identity crisis, one could see them taking a run at eDreams.
AirBnB. I can see two reasons why this cash rich company would want to make a run at eDreams. First, it would allow AirBnB to offer flights on their site – recall, they had an internal team working on flights, but shelved it when COVID hit. Second, flights are the first money spent in travel 80% of the time. Having eDreams’ flight customers gives AirBnB a massive amount of no-cost potential customers to market their rooms/houses/apartments to.
Uber Technologies. Uber, so far, is a provider of ride share and delivery services. What is interesting, is that Uber is making a big push into subscriptions. eDreams’ Prime program may be attractive to Uber. The travel business of eDreams would help diversify Uber away from a being a one (maybe two)-trick pony. Additionally, there should be some revenue synergies having access to eDreams’ travel customers. Uber’s CEO certainly knows travel.
As an eDreams shareholder, owning it in the last year has been frustrating. Everything seems to be going right with the company, except the direction of the stock price. That said, there seems to be ample short and long-term catalysts to help the company close the gap between the current price and its intrinsic value.
Disclaimer: Currently long. For entertainment purposes only. Not a solicitation to buy or sell any security. Do your own due diligence.