This under-the-radar travel stock has an ‘out of whack valuation’ and can pop more than 25%, Cantor Fitzgerald says

Online travel agency Despegar is an attractive investment opportunity in Latin America’s rapidly growing travel market, according to Cantor Fitzgerald. Analyst Brett Knoblauch, who said Despegar has an “out of whack valuation,” initiated coverage of the stock with an overweight rating and $11 price target. That forecast implies shares could gain 26.9% over the next year. The stock, which is down about 1% this year, jumped more than 7% on Thursday. DESP YTD mountain DESP year to date “Given the growth opportunities ahead for DESP, as well as profitability improvements, we believe DESP’s valuation is quite attractive … shares can do well even if its multiple does not expand, stemming from adjusted EBITDA growth and an increasing cash balance,” Knoblauch wrote in a Thursday note. Despegar, which went public in 2017, acts as a distribution channel for more than 240 airlines, 660,000 hotels and 1,260 car rental agencies, according to the firm. Most of the company’s bookings are done in Brazil, Mexico, Uruguay and Argentina. Despegar also has a strategic partnership with Expedia to source hotel inventory on its platform, and with Expedia-owned Vrbo to source vacation rental properties, Knoblauch noted. The analyst added that the Latin America travel market, which was worth $150 billion last year, could grow at a double-digit rate over the medium term — creating attractive growth opportunities for Despegar. Based on the firm’s 2023 bookings estimate, Despegar has roughly 3.5% market share of total bookings in Latin America. Its bookings are on pace to exceed its 2019 levels, but an overall recovery is still in process given its lower transaction volume levels, Knoblauch said. According to the analyst, Despegar could drive a 15% revenue CAGR for the following reasons: The company has an end-market growth of roughly 10% per year, which “acts as a floor.” It has an ability to increase market share given its growing inventory and successful loyalty programs. Rapid growth from Despegar’s B2B business of managing corporate travel and its ” white label business ,” which is scaling twice as fast as its business-to-consumer segment. Growth in the company’s vacation rental business, which accounted for just 1% of third-quarter gross bookings but could grow at a rate more than double its core business, boosting its top-line growth, according to Knoblauch. Knoblauch also expects the company’s adjusted EBITDA margins to improve, given the more fragmented Latin America travel market, as well as its EBITDA to free cash flow conversion to grow. “DESP operates a capital-light business, with revenue growth being highly accretive to margins,” he said.