We recently published a list of 10 Worst Cruise Stocks to Buy Now According to Short Sellers. In this article, we are going to take a look at where Despegar.com, Corp. (NYSE:DESP) stands against other worst cruise stocks according to short sellers.
The cruise industry accelerated after taking a significant hit during the COVID-19 pandemic. As per the Cruise Lines International Association (CLIA), ~35.7 million passengers are anticipated to set sail in 2024. This translates to 6% growth as compared to 2019. JP Morgan Research highlighted that major cruise lines enjoyed a successful 2024 wave season between January and March when operators provided the best deals. CLIA highlighted that, in 2023, the passenger volume touched a record 31.7 million, exhibiting a rise of 7% over 2019 levels.
Wall Street experts believe that travel exchange-traded funds (ETFs) are well-placed to soar on the back of a resurgence in consumer demand for travel-related activities, supported by post-pandemic recovery and changing consumer behaviors. Amidst some short-term challenges, the long-term outlook for the travel sector is positive as a result of demographic shifts and an increased preference for experiential spending.
Positive Demographic Shifts Should Be a Primary Growth Enabler
Earlier, Baby Boomers used to make up the core consumer base for the broader cruise industry. Today, however, an increased number of younger travelers continue to come on board. As per CLIA, ~73% of Millennials and Gen X travelers mentioned that they would consider a cruise vacation. Also, a renowned cruise company has recently mentioned that half of its cruise customers are Millennials or younger. This is because of rising affluence. Moreover, according to the bank’s research, the spending capacity of Millennial customers has seen an increase of ~49% since 2019. Today, the average net worth of an individual aged 40 or under sits at ~$259K.
The cruises continue to attract more first-time passengers. The cruise companies are seeing “new-to-cruise” in their 2025 bookings, with this customer category rising by more than 30% versus a year ago.
The bank believes that cruise operators are improving and modernizing their offerings to make them appealing and highlighted that key operators continue to invest in new hardware, notably mega-ships and private destinations. This has been driving more eyeballs to the broader cruise and tourism industry, accelerating new-to-cruise acquisition. CLIA recently highlighted that the cruise industry has been deploying billions in new ships and engines which give flexibility to use low to zero-GHG fuels with little to no engine modification.
Cruises Over Land-based Activities
According to a survey by the bank’s research division held in April, only ~29% of respondents have excess savings. Notably, ~45% of the respondents are expected to spend less in discretionary categories over the upcoming 12 months. This implies an increased cautious behavior even in the environment of moderating inflation.
This scenario is placing cruise voyages, that are cheaper than land-based vacations, in a strong position. Consumers are focused on value within discretionary categories. The value spread between cruises and land-based alternatives stood at 25%-30% today as compared to 10%-15% pre-pandemic. Despite higher inflation, cruise lines continue to focus on improved experiences, without compromising quality or service. This should further enhance their value.
Despite a tough consumer spending environment, both ticket and onboard prices increased over the past few months. This means that the demand backdrop is strong for the overall cruise industry. The bank’s research shows that more than 85% of tickets have been booked for 2024, with a focus now turning to 2025 and bookings already exceeding historical levels. Moreover, the industry should grow revenues by high-single digits over the upcoming 5 years, tapping ~3.8% of the global vacation market by 2028.
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A business person typing on a laptop in a hotel lobby emphasizing the comfort and sophistication of the company’s travel offerings.
Despegar.com, Corp. (NYSE:DESP)
Short % of Float (As of 15 August): 8.83%
Number of Hedge Fund Holders: 24
Despegar.com, Corp. (NYSE:DESP) is an online travel company in Latin America. Its product offering includes airline tickets, packages, and other travel-related products. It operates via 2 segments: Air, which consists of the sale of airline tickets, and Packages, Hotels, and Other Travel Products, which consist of travel packages, cruise tickets, and related products.
Short sellers believe that the company faces intense competition from local and global players, which is expected to limit its competitive advantages. Also, increased external and macroeconomic risks might hinder the company’s growth prospects. Short sellers opine that foreign exchange pressures might continue to impact its average selling prices, which can also weigh over its revenues. Moreover, in 1Q 2024, its gross bookings in the rest of Latin America saw a fall of 10% because of FX pressures.
If the currencies like Mexican Peso and the Brazilian Real continue to depreciate, it might make traveling abroad expensive for people of those countries. Also, Argentina (Despegar.com, Corp. (NYSE:DESP)’s third largest market) is in a recessionary environment, which might impact its revenues moving forward.
However, Wall Street analysts believe that the recent divestment of Destination Management Company (DMC), BRExperience, should help Despegar.com, Corp. (NYSE:DESP). Apart from improvement in operational efficiency and maximizing return on capital, this divestiture allows the company to better concentrate resources on its core business and further strengthen the organic growth profile. Moreover, its strategic focus on high-margin package sales and non-air revenues should help the company sail through a challenging environment.
Despegar.com, Corp. (NYSE:DESP) is expected to see expansion in its gross margin, mainly because of cost reductions and Al utilization. The analysts believe that 2H 2024 might generate stronger cash flow, with 4Q being the significant contributor.
Analysts at B. Riley upped their target price on the shares of Despegar.com, Corp. (NYSE:DESP) from $16.00 to $19.00. They gave a “Buy” rating on 17th May 2024. The company was in the portfolios of 24 hedge funds at the end of 2Q 2024, up from 20 in the preceding quarter.
Overall, DESP ranks 3rd on our list of 10 worst cruise stocks according to short sellers. While we acknowledge the potential of DESP as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than the ones mentioned on our list but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
