An Introduction to eDreams (EDR.MC, €7.28)

eDreams potentially provides the rare combination of quality, growth and significant value making it an exceptional opportunity

Below eDreams ODIGEO is discussed. A lot more could have been said. If you would like to know more or would like me to focus on a particular aspect in a future post, please comment.

Summary

eDreams ODIGEO (eDreams) is an online travel agency (OTA) that has been going through a transformation over the last several years. eDreams has been converting to a unique business model for its industry. Due to this model, unlike other OTAs, eDreams is becoming a subscription business providing high customer satisfaction through quality of service and low prices. This is causing eDreams to grow significantly in a large market with room for many years of further growth. eDreams stock price is not reflecting this quality and growth, and the stock could justifiably triple from here. Management are taking advantage of the opportunity and allocating capital towards buybacks.

Business Model

eDreams applies a unique business model for the industry. Its subscription model called Prime takes after the Costco subscription model where members pay for an annual membership. Here is managements description:

“The model we were inspired by is the Costco model… Costco charges a subscription fee for being able to shop in their premises. And then the prices on the actual goods that people purchase, just have a small margin, put on top so that Costco is able to offset the cost of running the business that they have. So that each additional purchase from the customers brings in revenue, but it brings in hardly any profit. And really, the level of overall profits of Costco is quite predictable, you just take their number of subscribers and multiply it in terms of subscription fee and it takes you to the profit that they should have. That also means from the consumer point of view, that they know that the best deal possible they're going to get from Costco, because Costco is basically giving back to the consumers, almost everything except what they absolutely need to cover the costs.”

Prime

The advantages of Prime for the customer are exclusive savings and benefits:

eDreams has confidence in its business model as it offers the following guarantee:

“Find a cheaper flight or hotel and we’ll pay you 2x the difference. That’s our best price guarantee, and only one of the reasons why over 7 million people travel with Prime.”

Customers who trust in the price guarantee know that they are being offered essentially the best prices they are going to get and so they have ease of mind and don’t need to waste time looking elsewhere.

Although eDreams does offer value for money it is actually customer service that is the #1 reason why customers subscribe to Prime:

“we again have published data that shows that the number one reason why customers actually take Prime is for the customer experience and for all of the additional things that we do for our Prime customers. Price is actually number two.”

The advantages of Prime for the company are:

· Stable and Growing Revenue Stream: The subscription-focused model provides a stable revenue stream that is both growing and easy to forecast. This contrasts with the traditional transaction-focused model, which is more volatile. The predictability of subscription revenue, based on the number of subscribers and their fees, makes the business's financial performance more reliable.

· Reduced Customer Acquisition Costs (CAC): As Prime is a subscription service CAC is significantly reduced for repeat business. This saving can be passed on to customers through discounts, making Prime more attractive creating a flywheel effect.

Growth and Potential

Prime has been exhibiting significant growth since COVID:

There is still a lot of room for growth. France is their most mature market and at the end of Year 7 they were at 6.2% household penetration and still growing.

If they get to 10% penetration in their European markets they will have 16.5m Prime members.

eDreams can also enter other markets with their Prime service. They are currently present in 44 markets but have only implemented Prime in 10 of the markets.

Cash EBITDA

Cash EBITDA is a key metric of the company’s:

“Cash EBITDA means "Adjusted EBITDA", plus the variation of the Prime deferred revenue corresponding to the Prime fees that have been collected and that are pending to be accrued. The Prime fees pending to be accrued are non-refundable and will be booked as revenue based on a gradual method. Cash EBITDA provides to the reader a view of the sum of the ongoing EBITDA and the full Prime fees generated in the period. The Group's main sources of financing (the 2027 Notes and the SSRCF) consider Cash EBITDA as the main measure of results and the source to meet the Group's financial obligations.”

Cash EBITDA recognises the cash as soon as it comes into the business whereas regular EBITDA recognises it when the transactions occur. How the calculation for EBITDA works is, whenever a Prime customer transacts, the prime discount is recognised as revenue (and so contributes to EBITDA). If the Prime membership costs more than the discounts achieved over the course of the year then any remaining Prime membership fee is booked 12 months after the member initially paid.

Margin of Safety

In their capital markets day November 2021 management gave medium term guidance for FY25. eDreams management has a record of hitting their guidance and every indicator suggests they will once again when they announce their FY25 results at the end of May. They have also recently given some guidance for the next few years, I use these figures to come up with estimates for Cash EBITDA and FCF. I only expect my estimates to be broadly right they are not intended to provide any sense of precision.

Question is, what is an appropriate multiple for a high return on invested capital subscription business that is growing Cash EBITDA and FCF double digits. I would suggest if the company continues to perform it is possible the stock triples in the next few years and could still be considered inexpensive thus providing a significant margin of safety.

Risks & Mitigants

The travel market is large and so eDreams has significant potential if it can continue far into the future as it has in recent years. It must be asked if the performance can continue? What is it about eDreams that is causing their performance? What could stop them from performing? Below are some thoughts on these matters. If there is a serious permanent issue in any of the below areas then the thesis is likely broken and eDreams does not provide an opportunity:

· Business Model: If a competitor comes up with a better business model that somehow provides more competitive pricing and better customer service, then eDreams will struggle. However, I believe the Costco model is a strong business model where any savings generated are passed back to the customer making it very hard to beat on price, particularly as eDreams gains scale and any scale economies will be shared. The stability of subscription means less CAC providing again more value that can be passed back to the customer. Although in a different industry, the success of Costco shows the strength of this business model.

· Issue with suppliers: If they cannot get supply towards as good a price as others, whether that be particularly in flights, and to a lesser extent hotels and then to an even lesser extent car rentals and anything else, then they will not be competitive. It is likely true that most suppliers are agnostic as to where there customers come from. Airlines and hotels just need to max out their capacity to make sure they are cost effective. It may be the case that the larger the OTA the larger the leverage with the suppliers and so the better the prices. eDreams does have significant scale within the industry. Having said all this if the scale is with the supplier then they may have all the power. We are currently seeing to some degree a battle being played out with Ryanair (Ryanair started it), the largest airline in Europe, however this has been ongoing for a number of years and has not prevented eDream’s success.

· Issue with Customer Acquisition: A sudden increase in CAC relative to other OTAs will be a problem. The company currently measures their Life Time Value to Customer Acquisition Cost by conservatively assuming that after year 2 the customer unsubscribes. eDreams does not provide precise figures for this calculation but they say the figure is between the 2-3x range. The main reason I can see that customer acquisition costs increase is competition but this competition will impact all OTAs. It will then be the most efficient OTA that will win. As eDreams doesn’t make a profit on transactions and has scale they should be reasonably efficient.

· Competition: One of the main reasons a competitor won’t come in and try and follow the same business model of eDreams is because they will be cannibalising their current business and it will take years of disappointing financials to establish the subscription model. It is not impossible though for a business to choose to do this just as eDreams has, or for a brand new competitor to come into the market and try to imitate. However it is also not easy, the internet has now been about for decades and rather than gaps in the market there are many well established OTAs to compete with. The best way for them to fend of competition will be to gain scale, share the economics and continue to focus on the customer.

· Issue with Brand/Execution: I have lumped these two together as they are quite generic. Customers need to understand the business model or at least appreciate the cheapness and quality of their service. If management don’t execute and provide a quality service then the brand will be weakened. eDreams is the highest ranking OTA on Trustpilot and management claim their NPS stats are strong and improving.

Catalysts

Sadly there is no clear catalyst to encourage the market to apply a higher multiple to eDreams. But the predictable results and growth will not be ignored forever, so I expect the multiple to improve as the company continues to perform. In the meantime eDreams is buying back stock. Currently they are implementing a €50m buyback and by my calcs have so far bought €4.6m shares for €36.7m at an average price of €7.92. Previously in 2024 there was a buyback and tender offer where they spent nearly €36m buying shares a little below €7.

Conclusion

eDreams appear to provide the rare combination of quality, growth and significant value. eDreams unique operating model for its industry provides a business that has predictable results and high ROIC. Prime has exhibited enduring growth for several years in a tough environment and there are no signs of it stopping in what is a large addressable market. All this can be bought at a low multiple and so there is a significant margin of safety. eDreams appears to be an exceptional value stock.

Again, a lot more could have been said about eDreams and its business. If you would like to know more or would like me to focus on a particular aspect in a future post, please comment. Thanks.

Disclaimer: The information provided in this article/post is for informational purposes only and should not be considered financial or investment advice. I am not a licensed financial advisor. All investments carry risk, and you should do your own research before making any investment decisions. I may hold positions in the stocks discussed and may buy or sell them at any time.