Yet Another Value Podcast - Ave Maria Focused Fund's Chadd Garcia talks eDreams, travel subscription platform in Europe $EDR.MC

Episode Date: September 13, 2023

Chadd Garcia, Portfolio Manager and Senior Research Analyst at Schwartz Investment Counsel Inc. - Ave Maria Focused Fund, joins the podcast for his second appearance to share his thesis on eDreams ODIEGO (MSE - Madrid Stock Exchange: EDR), travel subscription platform and one of the largest e-commerce businesses in Europe. Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:43] Overview of eDreams ODIGEO $EDR.MC [9:27] eDreams' overall vision and current valuation [13:34] Prime model and its potential growth in European markets [17:30] How eDreams is different from TripAdvisor / why eDreams the one to crack the membership model [23:13] Costco comparison [25:24] Churn rate / U.S. investor perspective on eDreams / changing disclosures [34:07] Competitive landscape, in particular, response from Booking as eDreams grows [38:45] Hotels initiative / breaking into the U.S. market [43:13] Capital allocation strategy [47:20] Final thoughts on eDreams: risks to consider / headwinds / Chadd's personal experience using eDreams platform Today's episode is sponsored by: Stream by Alphasense Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced buy-side analyst conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts 1-on-1 and get your calls transcribed free-of-charge—all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For more information: https://www.streamrg.com/

Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you.

But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you.

Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. All right, hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, I mean a lot, if you could rate, subscribe, review, wherever you're watching or listening to it. With me today, I'm happy to have on for the second time. My friend, Chad Garcia, Chad is the portfolio manager at the, I'm doing this for memory.

It's the Ave Maria Focus Fund, right? Avery Maria Focus Fund, ticker A-E-A-X. Say it again, just so people can hear it. Ticker A-E-A-X. And Chad, he is, they have won the Category King Award four times this year, and we were talking for it and said, well, you know, if they award them every month, it would actually be more. but congrats on a good year so far. I won't dive too much more into it for compliance reasons. But speaking of compliance, let's start with the disclosure. Nothing on this podcast is investing

advice. That's always true. Today we're going to be talking about an international stock and international stocks carry extra risks, extra consideration. So everybody should keep that in mind as we talk through the stock. But Chad, I'll turn it over to you in one second. I just want to say I was so, I looked at this company a few times before, but I really dove into it yesterday. And you and I have some mutual contacts in common who will probably attest you. I was just calling everyone like, I'm so interested in this. I need to talk. I need to understand this port.

So I'm really interested in this idea. That's going to come off through the podcast. But let's dive into it. The company is eDreams and I'll turn it over to you. Sure. Yeah, EDreams, docio. I started looking at this in 2019 and I had the same feeling that you have now when I looked at it. Like, what is this small European online travel agency that,

I never heard of that has an American CEO and seems to be doing everything right. So the company was formed in the in the 1990s, like several other online travel agencies. It was put together through a combination of several acquisitions. It went in public in 2014. It stumbled a little bit when Google adjusted their algorithms on their search engine optimization. And then that caused a change in management where Dana Dunn and American took over. And since then, it seems like they sidelined Googles as eliminated kind of the Google problem that's played other online travel agencies, particularly Expedia.

And they launched a subscription program that they called Prime after Amazon's Prime. It's more, in my mind, though, akin to Costco's program, but I don't think Costco doesn't have a sexy name for their subscription program. It's called the Costco membership. But, you know, since then, the business has done well. I invested in it in 2019. COVID hit. It was a painful time to own it through COVID. But the Auburn Maria Focus Fund, we launched in May of 2020, so right after COVID hit. It's a nice time to launch fund.

No, no, no, no. March would have been a nice time to launch fund. By May, the world still looked like it was falling apart, and everything was priced up because of the Fed's liquidity. So it's a little challenge, it's a little more challenging than you would think. But that said, the company, which has its fiscal year end on March 31st, printed their Q4 in late May, early June of 2020. and they had some months of COVID, COVID's impact in it.

And you could see that the company would have several years ahead of them, even with significantly curtailed travel. And at that point, I invested in the Ivy Maria Focus Fund, and kind of shortly after the Q4 print. And that, you know, it's been a good decision for us. So let's fast forward a little bit to today, right? the key thing with, and I would encourage anyone to go read their investor deck because I think it lays out a lot of this nicely. You mentioned the Costco membership. They start talking about Prime

Costco. But I guess the key thing at this point is they've kind of got proof of concept with Prime, right? They're up to 4.7 million Prime members. It sounds silly calling it Prime. I just think Amazon want to say, but they're up to 4.7 million Prime members. They're talking about, hey, the Prime, you know, it's got all the things, subscription base, better margins, all this type of stuff. So why don't you just quickly cover what the prime offering is, what it gets you when you sign up for it. And then, you know, most of my questions actually relate to prime because that's really the key question point on the story currently. So let's back up real quick.

Yep. Eaterings is a global online travel agency, but about 80% of their business is in Europe. And they're focused on leisure travel, so they're not really exposed to business travel or traveling consultants. They're exposed to leisure, which rebounded a bunch quicker after COVID. than travel in general. And what they've done is they've built a prime program. You spend 55 euros on it a year if you're European,

and it gives you discounts and travel. And so if you look at the legacy of e-dreams, they started out focusing on flights. And so for an American, I think it's a little hard to at first kind of get your arms around it because online travel agencies for flights in the U.S. is a horrible business. And the reason why it's a horrible business is that you've got the top four airlines in the U.S. control about 75% of the roots. And they have fantastic apps that you can use, that you can book your tickets on, you can make changes, et cetera.

In Europe, the top four airlines control 29% of the routes. So you have much more fragmentation. 80% of the flights in Europe are multinational flights. they're often multi-legged, and their customer service isn't as great as it is in the U.S. Even though people complain about U.S. customer service, it's very rare in Europe to find a 24-7 customer service phone number. Their apps aren't up to the level that the U.S. apps are. And, you know, there are over 690 airlines that operate within Europe. So it's highly fragmented.

The airlines pay online travel agencies a fee for booking customers via their airlines. And online travel agencies often charge their customers a booking fee. So there's two revenue streams traditionally for an online travel agency in Europe. E-dreams charges their prime members, 55 euros membership fee. And then for that, they give back both the airline fee and the customer direct booking fee. And so the customers can generate substantial savings from it. And EDream is only looking to make the 55 euros off of their customer. And so if they just book a flight, then it pays back typically within two buttons.

And by the way, EDreams also extends the prime pricing for anybody. who you book that's traveling with you. And so, you know, if you book a family of four, essentially pay for itself on the first booking. And when you say pay for itself, just to clarify for listeners, the prime membership pays for itself, right? I subscribed for a 55 or 80 euro per year prime deal.

I get 50 euros off my first flight. My second flight, I get 50 euros. Boom, I've saved 100 euros. I've paid for the prime deal. And there shouldn't be too many, there shouldn't be too many opportunities for an airline to be able to price cheaper than the online travel agency. in Europe because of the fragmentation for, you know, a couple of reasons.

Number one is that there is a history of booking with online travel agencies and airlines pay for that, pay them for to do that, number one. But even more importantly is that because of the fragmentation, there's more opportunities to do what in the U.S. they would call hacker tickets. So you fly outbound on one airline and fly inbound on a different airline. You put the two tickets together and they're much cheaper. particularly if you have an app such as eDreams app, which will help you, you know, manage your flights.

Perfect. So E Dreams Online Air Travel Agency should be the price, the lowest, the lowest price way to book in Europe. And then if you're a prime program member, you even get a lower price. Perfect. So let's, I'm going to dive into the prime. We'll dive into the prime membership a second. But let's just start with the overall vision, because I think that's what's really exciting.

And like, again, the Q1 results were really good. The Q4 results were really good. Like you're starting to see kind of the proof in the pudding. And they're kind of starting to hit the flywheel is the hope, right? But let's just start the overall vision. They've laid out, I believe it's 2,025 targets. And can you just talk to me about what those 2,025 targets are and what they would kind of imply for the stock so people can get an idea of, you know, why it's exciting. Why the bulk case?

Why I was so excited yesterday? What the bull case is. Well, they laid out the vision in November of 2021, and it was to have 180 million plus of EBITDA and 7.25 million prime members coming out of COVID when the lockdowns were released in June 21, they had about a million. prime members, and today they have probably 5 million prime members. They've grown 4 million prime members in two and a quarter years. They're still growing about 375,000 prime members every quarter, which is on pace to hit that 7.25 million prime members by the end of fiscal year 25, which is March of 24. And now, a quick word from our sponsor.

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But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. Can you talk to me?

So on page, the 7.25 million members. members, the $180 million cash EBDA, can you talk to me, and again, this would be most of the cash EBDA Prime is a subscription membership. We'll talk more about the prime and the implications, but no, subscription, $180 million subscription is probably going to carry a higher multiple than $180 million in EBDA from one time booking fees and stuff. But $100 million, $180 million, if they hit that, can you kind of put that into perspective versus the current stock price? Well, last year they delivered 84 million of EBITDA. They'll probably hit 125 to 130 million of EBITDA this year. If they hit the subsequent year 180 plus, then you're looking at EBITDA growth of north of 40%. And so, you know, if you have a revenue and earning stream that's predominantly driven by subscription, makes it very stable, what would you value such an earning stream at, you know, if that earning stream is going at 40% plus? You know, I would say it'd be in the low single digit

free cash flow yields. And so if you're looking at a one and a half to three and a half percent free cash flow yield, that probably gets you to 20 to 30 euros stock price. And I think that's worth it's worth that today, 20 to 30 euros and it's trading at $6.50. And just to put it for people, you know, one and a half to 3.5% cash yield up, I'm doing the math in my head, right? That's about a 33 to approaching 50 times free cash flow multiple if you want to use a multiple set of cash flow yield. So as you said, it's trading between 6 and 7 euros. You think it's worth about 20 euros today and it could be greater as Prime kind of continues to grow. I mean, there's great stats in here.

hey, they've only launched prime. I think it's in four of the 11 countries that they cover. And obviously, they've got more, they've got flights to over 44, I think. Am I kind of thinking about that math in my head correctly? They've launched prime in more countries, but it's not, I mean, they have prime going in the U.S. right now. But it's not a fully functional prime. So fully functional prime is just kind of the core European markets at this point. And so if you want to talk about the growth beyond fiscal year 25, I mean, one is just deeper

penetration in the current European markets with prime and right now in their core markets prime is about 3% penetrated in in their core markets for travelers who would use online travel agencies in their highest penetrated market which is france it's four and a half percent penetration rate and you know this this product saves customers money and so that's that's it's a pretty good value proposition if you're a traveler in Europe to use. And so I would imagine that they're going to have much more success growing the prime offering within Europe just on flights. Now, you know, they will sell you hotels and they have sold hotels for several years.

They haven't really made a large push into it. And that's what's, you know, really exciting to drive growth beyond their fiscal year 20. targets. So, you know, the reason why it's, it's taken a little bit of time is that their website was predominantly kind of flight focused. And it's not to the level yet that they really want to do a hard push into the hotels. I mean, they'll sell you one. And I've, I did some travel the summer and I've used it. And it was, I thought it was fantastic. And I thought their offering was good. But, you know, they want to be able to, if you want to search for a hotel, let's say you're traveling to Paris and you like Sofitel brand hotels.

you can you know right now you can put in there and have a map show show you all the hotel offerings that they have in Paris but they want them to be able to further parse that down so you know show me all the soap hotel hotels in Paris and put it up on the map for me functionality like that furthermore the discount that you get for being a prime member you have to on hotels right now you have to kind of put a code in and so you get it at the end you don't really see it up front on the on the search stream and so they want to kind of figure a way around that. So customers really give eDreams the credit for delivering the savings that it does. But this is coming, I would suspect, by the end of this calendar year or early next calendar year. And I think that the prime program will give them

a structural superior product in which to go after bookings.com, which right now has a, you know, basically a monopoly in hotel bookings in Europe. So I think there are, so look, I think you framed the bull case great. And as you said, just getting to hotels, expansion. Like, they've got the 2025 targets, which the stock would be a multi-bagger on the 2025 targets. But what's so exciting is if they hit those 2025 targets, like it's kind of just the beginning, right? They'll just be ramping up into hotels, more markets, everything. So you've got tons of upside here.

They're coming to the U.S. They're coming to the U.S. They've hired an airline relationship manager in the U.S. Last winter, springtime. You'll see that happening. But you're not going to see that until after they launch hotels. That's the big market they need to go after next. Let me turn to, my computer's running a little slow.

I hope it's not affecting the video, but neither heard of that. Let me turn to the question, right? This was asked a little bit on the Q1 call. But the big questions in my mind, there's two like kind of, branching questions here. And it's, hey, these guys are launching a membership model. There are a lot of travel, but OTA travel business out there, to my knowledge, except for one, none of them have tried a membership model like this, right? And the one exception is TripAdvisor, which we'll talk about separate. Let's start with TripAdvisor, actually, because that is, like, people who've

listened to this podcast, people who've been in the value investing community will know, trip advisor tried to do something like this. And some of the stuff you were saying sounds very reminiscent of trip advisor, right? Like, with the hotels, trip advisor said, hey, join us $50 a year. We'll give you a discount on the hotel. But there was, I think was price parity deals with hotels. They couldn't show you the discount up front. You had to be a member and get all the way to the end for them to show you the discount because of price parity deals. And, you know, the trip advisors thing, it sucked a lot of investors in. Myself included where they had this huge funnel. They argued we create all this value. They had this huge funnel,

a differentiated thing. They tried to launch the membership model and for a bunch of different reasons fails. So I guess the first thing in my mind is, hey, Chad, why isn't this trip advisor all over again? Well, I would say that if you have a moat, the evidence of that is the corpses of your competitors. And then, and this is one of them. Starting a subscription program in travel is not easy. You know, eDreams has done it, but it took them a long time to do it. It's still in their early days, but they already have success. probably took them beginning in flights in order for them to do it. In Europe, it's legal for a travel agency to price a flight cheaper than that of an airline.

And when you have the two levels of booking fees traditionally that you can give back, I mean, the economics there are easy to see for a traveler. Like, okay, I would pay 500 euros for a flight. I'm a prime member, maybe I pay $4.50 because they're not making the booking fees. I mean, that's pretty easy to see. And then if you look at booking or TripAdvisor, I mean, they can't sell a Marriott hotel room cheaper than Marriott because of the agreements with the hotel years, the price parity agreement. But if you book through e-dreams and you book a flight and then you tackle hotel room,

on to your trip, you kind of, you've created a dynamic package or kind of a walled garden. And within that wall, E Dreams is free to give the, to give a discount back to their customers. And like from the hotelier's perspective, who knows where that came from? Did it come from the flights? They come from the hotels. Like, where to come from? So in a closed environment, you can, you're, you're free to do more of that, which booking can do right now, you know, unless they really push into dynamic packages and TripAdvisor couldn't do

when they tried to launch a program. So a lot of it in your mind is just because this actually goes nicely into the booking because the second question is, hey, booking, Expedia, I think there's Despergaras, the Latam one, a few others, like most of the, almost all of the other OTAs have some type of loyalty or rewards program. And they all kind of look alike. Like they're all, to my, to my knowledge, it's not that great. You kind of get like 1% of your cash. You kind of get credits.

Like I book all of my stuff through Expedia, which is probably a mistake on my end. And after all the travel I've done over the past five years, I think I've got like 60 bucks in credits from them or something. But all of them have a similar structure. Like, why was E Dreams the right one to crack, to crack getting a membership model? Because I would have thought booking, right? Booking is the world's largest travel company. they yes they've got some trouble with marriott hotels and stuff but in europe it's a lot of independent hotels hotels are a lot higher margin of flights i would have thought they were the

best position to kind of launch a membership model well they have the price parity agreements with the hotel years to deal with and so they can't price cheaper than the hotel years um and then they're also competing with hotel hotel years their own loyalty programs i mean i i've used expedient, basically you get 10% of your, you know, every, every, every 10 nights you stay, you get the average of the 10 previous nights back to spend on their site. That's how their program works. But, you know, over time, I just gravitated, with a lot of my travel being in the U.S., I just gravitated towards a Mariah program, and then Mary got the credit card,

and that worked much better for me. So I think, you know, why did e-dreams get it right? I think they got it right because first they were in flights and flights you could price cheaper than than airlines. And so it made sense for them to do that and kind of launch the prime program off of airlines. And now that will have benefits into hotels because, again, it will create this kind of walled garden where they can give the discount backs for both booking fees, the hotel booking fee,

as well as the airline booking fee and in the eyes of the hotel years, then it won't really matter to them because it's not going to appear like they are undercutting Marriott from a prosperity perspective. Let me ask another question. So they've got the Netflix and Costco comparison, right?

I guess I just want to dive really into the Costco comparison. Here with e-dreams, what their argument would be is, hey, we get the prime membership. We're going to give you the flights at cost, pretty much. Like Costco's giving you close to at cost and then we'll make all our money from the prime membership.

I guess my question's there is, what's the marginal cost of them giving a flight? Because it does strike me if, I think they get like three to five percent commission for selling a flight that actually might be a little high. If they're kind of giving that all back to you, like what's the marginal cost? Could they start losing money on prime members

who are traveling once a month or something? Well, I mean, from that, from the frame of that question, they would I mean so you're saying if they do 12 bookings a year yeah I guess what I'm just wondering is you know if I'm Expedia

and I'm someone else a competitor and I have a guy that person who's booking a flight a month with me and I'm getting like 3% commissions that's going to add up to I don't know $360 in gross profit over the year and I guess what I guess what E Dreams is saying

is hey you just pay us to $80 per year membership, and we'll give you that gross margin back, right? Which is a great deal, win-win all around. I'm just wondering, is there marginal cost here that's really eating into it where the more someone does, you could get really underwater on a prime membership? No, I don't think so. I mean, you would, well, number one, they've got the IT, AI-driven IT, actually. There you go, an AI play, let's go.

That would a lot of them to kind of pull levers to kind of prevent that from happening. But I don't, I don't think that the overhead cost of the business is going to be going up because some of the, you know, books 12 times a year as opposed to two times a year. Okay. I mean, it's all, it's all IT and, you know, back and overhead that they're going to be utilizing. It's the margin, you know, it's the, it's the marginal cost that they're, you know, the variable cost component that they're kind of taken down to near zero. Yeah. Now that I think about that silly, let me go to a different one. right? I think they've only disclosed churn once. And somebody asked them about churn on their last call and they said, we don't disclose it. We only disclose it once so you guys can see how it's going. But I think they said churn is going well. And my worry is, you know, with TripAdvisor had this, right? You would get to the end and they'd say, hey, your hotel is going to cost you $500, but sign up for TripAdvisor Plus for $50 per year and we'll save you $50 on this hotel or maybe even $75. So why not sign up? And people would sign up and then guess what they would do? They would cancel before they got hit with this.

second charge. And I do wonder, I think people probably fly, especially in Europe, fly a little bit more, but could you have a turn issue where, yeah, you've got tons of people signing up because it saves the money on the first trip, but then you're kind of having an exploding problem where everybody's canceling after a year and they've kind of already got the savings. I mean, you would see this, well, this is going to save people money on multiple trips and Europeans like to travel and they take more than one trip a year. And so the incentive is to keep keep the pay. prime program. And it gets charged up front. And so it's not like they're going to give you the savings away on the first one and not be able to recover it because, you know, they charge it

up front. The churn, true churn, I would suspect, is high single digits, low double digits for true churn. That means somebody doesn't like the program affirmatively wants to quit. I would say that the churn looks to be much higher and maybe, you know, mid-20s, maybe percent. And as I think, if I remember back from the one time they disclosed it, because in Europe, it is illegal for a company to reach out to their clients if the client's credit card expired. So if the credit card expires and they say, hey, you know, usually you get an email on the U.S., hey, your credit card expired, please update it. You can't do that in Europe. And so those figures are in their turn numbers, but then when the client goes and books their next trip, they find out that their credit card expired. They update it and they resubscribe.

And so that's not, in my mind, that's not true turn. It's just more delayed revenue. That is one of the silliest rules I've ever heard. It seems so consumer unfriendly. It's ridiculous. A lot of my questions have come. I'm U.S. domestic focus, right? A lot of my questions have come, and I think I've got a U.S. point of mind, and I say this because you mentioned, hey, Europe, they like to travel more. They're famous for their long summers, hopping through cities and stuff. Do you think a lot of investors who are U.S. focus are having trouble with e-dreams because they see, hey, U.S., 80 to 85% of the flight markets dominated by Delta, Southwest, United American. Hotels, you know, it's Marriott, Hilton, one other one. You know, it's really dominated by the brands. Whereas if you go to Europe, as you mentioned, flights are really

fragmented. Hotels are crazy fragmented Europe. Yes, they do have Marriott and stuff, but most people who go are going to stay at a local hotel. They've got tons of local boutique hotels and stuff, just much more fragmented, much more room for an OTA to kind of take share, much more room for flights to compete with the OTAs by offering cheaper flights or offering bigger commissions to kind of put their flights at the front of the line. Do you think that U.S. framing is hurting investors from understanding what's happening here? I think that could be a barrier to entry for some people. I mean, it took me several months to get around to looking at it when my friend who's a

large investor told me about it. And I kind of looked at it from an American perspective. And then after a few months of him bugging me, I finally looked at it and realized there was something there. But that said, if you look at the shareholder base, you know, some of the most astute investors in the shareholder base are American. American funds. So, you know, there are Americans who definitely get it. Another question. A lot of people, and this kind of relates to the churn question I asked

earlier, but a lot of people, when I said, hey, Chad's coming on e-dreams, what do you think, both on the replies and in kind of DMs and stuff, said, hey, it seems like they're always moving the ball on us. And not in terms of their long-term guidance, but the disclosures here are constantly evolving and changing. And a lot of people think they're kind of trying to hold the wool over everyone's eyes by changing the disclosures constantly so that nobody can kind of track them. What would you see to that criticism? And how did you get comfortable with kind of the changing disclosures and natures of what they're giving you? I mean, I don't think the disclosures have changed, you know, all too much. The one disclosure, the one major change that they had happened last quarter

where they stopped disclosing bookings for prime members. And because if you look at, I mean, This company is terribly covered by the sell side, and one of the things that the sell side that do cover it is focused on is on the booking numbers, and the booking numbers aren't relevant to the economics of the company, because over 50% of the revenue is now coming from prime, over 55% of the profit is now coming from prime, and as that continues to evolve, the economics are driven by prime absolute membership members, the rate of prime growth and prime sharing is not driven by bookings. And so they did make that one change, but it doesn't really bother me that much. Doesn't bookings matter just because it shows how frequently the prime members are

using this and thus it's an indication of how much value the prime members are getting. Like if I showed bookings was going way down, either A, people are not traveling as much, which is bad for prime, or B, people are booking off prime using a different thing. They're traveling as much. I'm just losing share, which is a disaster because one of the things with the membership model is you want to basically take 100% of your customer spend once you get the membership model and can offer them a bigger discount. Well, I would say that if there's any issues with the current prime membership, you would

see that in the margins, and the margins are going up. You would see that in the margins because they would have more churn. and if they have more churn and they have to spin more to acquire new kind of prime members to keep the net prime membership growth up, you'd see that in the margin. Because I would assume, I assume in my modeling of it, that they give back, or they give to Google, a good portion of the first year's prime fee. And so they really start to make the money on prime members after year one. about 75% of

prime members come to eDreams directly so they don't go to Google or other meta search providers to get there that's what drives the profitability of the of the prime program kind of like that number

and anniversary members and so if there's problems with it you're going to see it in the margins and right now the margins are going up so and as you said That's another great thing about the prime. Once you subscribe to something, once you subscribe to something and they say, hey, we're going to give you the cheapest things cheaper than you can find anywhere else. Your customers not only just don't have the incentive to go to Google, they'll often start booking. They just open your app and book directly through you, which saves you all the Google marketing and everything fees.

So it's great for your overall business. Well, booking was at Goldman's conference yesterday presenting. E Dreams is out there meeting investors today. They're not presenting, but they've been invited to Goldman's conference, which is, going to be fantastic exposure for them. But setting that aside, booking talked about 48% of their customers book on their app and about 50% book directly with them as opposed to going through Google. If you look at eDreams, about 58% of their customers book on app, which leaves 62%

desktop, either going directly to the website or through Google. They don't disclose that, but they do have a much higher, at least on the app side of things, people booking directly with them as opposed to going through Google than even the 800-pound gorilla price line does. And I think that as they do a bigger push into hotels, they're already into ground transportation, they're into rental cars. When they do a big push to hotels, you know, they could ultimately be like the one-stop shop for European travel. As they push into hotels, obviously they get more and some more.

We talked earlier about how they were, you know, flights, which probably five or seven years ago were a much lower value business. Even today, it would be a much lower value business because it's more competitive. You get lower fees versus hotels. They were advantage versus booking because that enabled them. That gave them a better launching point. for the membership model. As their membership grows, and as they push more into hotels, like eventually you have to see a competitive response from booking, I would imagine.

So how do you think this plays out as we start to see a competitive response? Like, do you think booking, once they see seven million members here and 180 million EBITDA, do you think we see a booking membership rollout? Do you see like kind of a battle in the streets for members going that way? Well, you know, bookings in their arena. They're trying things. So the question is. Booking's the man in the arena.

The e-dreams is the man in the arena. We're all in the arena. Yeah. And the question is, is that, like, will it be successful in launching a subscription program? Will they be successful in flights? How long will it take? And, like, will they ultimately care?

Yeah. So if you look at, I mean, just go back to Bookings talk yesterday at the, at the Goldman Conference. They are trying what they call connected travel, which is dynamic packages, having more than one product. They say that flights are important to them. So the way that they are getting into flights, and flights isn't easy, by the way.

So think about this. You've got over 690 airlines in Europe. And each of them have their own IT systems. And so just to build the APIs to deal with 690 different companies' IT systems is challenging. And then once you built the APIs to talk to them, you've got different fair rules and fair policies that you have to be able to take from an airline

and translate onto your website. And so it's not easy from an IT perspective to get flights right. And booking doesn't have that capability in-house yet. What they have done is they've went to the number three player in European flights, E-traveli, and they've had an agreement with them that they've extended through 2028 to have E-traveli white label a flight's product for booking. And then they ultimately wanted to bring it in-house, and they tried to buy them.

And right now it's held up by the European regulators. I don't think it's going to go through. And so they, you know, if they are successful in flights, it's going to take a long time. It will, and if they are successful, you know, they'll have an outside entity, basically have them over, have them over a barrel on, on the program. Like, you know, maybe they have, maybe they each have each other over the barrel, but. That's what I mutually assured destruction in some way, yeah. Yeah, but then, right, but you have, like, another organization that's getting economics on it. on you, right? Their whole business model right now is built on hotels where they basically

have almost a monopoly. And so, you know, in addition to the challenges of building a flights program, you know, they also have the challenge of building a subscription program, which, which, you know, takes some, take some time. And it's, it's a different model than they've built their business on. And so, you know, I look at it and see a situation that's that's similar to to HICO, the aircraft parts manufacturer. You know, like there's a Harvard Business School professor, David Yoppy, who had a book called GEDO Strategy, where you use the competitors' size against them if you're a smaller player.

And in the case of HICO, they make replacement parts for commercial airlines and commercial aircraft. They price about a 30% discount to the original equipment manufacturers, and they capture about 30% of the market. And the OEMs are not going to get into a price war with them because they'll just rather, you know, see 30% of the market as opposed to crushing the margins on the 70% of the market that they retain. And so it seems like this situation is very similar. I mean, EDreams doesn't have to kill booking, but imagine how big they would be if they got 5% of their European hotel volume. On the hotels, two or three people when I was talking to them about EDream said they were a little skeptical of the hotel initiative.

And they basically said, look, hotels in Europe, again, I'm American focused. It's easy to think, oh, you're just going to deal with Maraud and Hilton and you've covered 85% of the rooms you need. They said, hotels in Europe, you really need to go, like, door to door, not getting connected to, you know, individual hoteliers, inside, getting them on your website. And that takes a lot of, it takes a lot of sales and marketing. They said, look, if you look at eDreams, most of their hotel API, not all, but most of their inventory, seems to be coming from there just buying the book. booking API. Do you think, is that right? Or do you think it doesn't matter because maybe that's the case right now, but, you know, in five years, they'll have more members and they keep building this out, building this out, building this out, eventually they'll get

them to tour on their own. Well, let me ask you, if you're a hotelier in Europe, what do you think of booking? I'd probably want to, I'd probably, it's the same if you have an online business. You'd probably like a competitor to Google just to bring the margins down and have different places to point people. Well, I think there's your marketing right there. your sales and marketing right there for E-dreams. And then furthermore, I would imagine that the E-Dreams prime member is probably a higher value customer for a hotelier than your average booking customer, which may be a little bit more flighty and might cancel a little bit more often

than somebody who's going to go out of their way and spend 55 euros to be in the membership program in order to travel. Yeah, you know, that might be true. It does strike me like hotels seems to me is the way you really unlock this prime membership because again, I think you get roughly three percent fees on flights and you probably get five to 10 percent, maybe more on hotels if you're like boosting someone to the top of the page. But also hotels are going to be a much larger purchase in general just because you book three nights at 300 versus one trip at 300 or something. So it does seem to me like as they unlock the hotel inventory, that's where the prime membership really starts unlocking because that's where they have a lot more. margin that they can give back to the consumer or that they really can start proof pointing the value of this membership up i might be i mean i'm not an expert i might be imagining

that but that seems like a really interesting unlock and again they they built they built a five million member program on the back of flight exactly but it just seems like you know they one of the things that got me so interested is q4 and q1 like it a year ago i would have been really skeptical right i would even say chad we saw this was trip advisor nobody does that. Now, it's just, hey, the proof is in the pudding. Like, we're seeing the membership to accelerate. You're seeing it starts to be profitable. It just seems to me like as I start, as in 2025, we were doing an update, it seems like we'd really be focusing on, hey, the growth can accelerate because they've got so many members and they're just starting to get

the hotel inventory. And that's where they really unlock the value. That's the kind of the most interesting piece of it to me. And look at it, look at it, like when they do come to the US, I mean, having the flights and the hotels is going to be, is in my mind, how they're going get value for for us customers because as we as we discussed you know the the airlines you know are dominated by the top four there's there's not really a place for the OTAs to extract much value there you have the you have the price parity agreements with the hotel years but if you can create kind of a walled garden where you have flights plus the hotels then who knows where the discounts coming from and and like even the the price parity agreements with the hotel years in the U.S.

and the airlines, like, you know, have exclusions for the dynamic packages. No, I definitely hear you, though. You know, I do think you mentioned merit loyalty. I'm with you, brother. I think I'm Lifetime Silver, but one more year I might hit Lifetime Gold. I do think U.S., it's just tough because 85%, I think it was a mistake to let the airline market to get to this concentration, but that's neither here nor there. 85% concentrated in the airlines.

The hotels are quite concentrated now as well. like you have a real reason like and these companies are constantly pushing you to book direct get all the loyalty points and everything i could see like e-dreams making people money ultimately talks but it's tough because the largest customers like the most valuable customers are kind of already locked up in these loyalty programs it's going to be tough but here's the nice thing if i'm right if i'm right and you're wrong in the u.s guess what there's still all the upside we talked about in the europe and again the proof is already in the pudding there let me talk about longer term this again they're One of the nice things about a subscription business that's just on the inflection point is it's high margins. It's super visible. And as it inflex, like, I think people can be kind of shocked to the margins on the upside generates a ton of cash. What do you think capital allocation-wise, how does this play out? Well, if you go back when I first invested in this pre-COVID, I think they were looking at a couple acquisitions. I think those are off the table because I think their competitors were really hurt in COVID.

What type of acquisitions do you think they were looking at? Just buying the number four player merging with the number three player. Maybe some local markets in Europe. There's always like a brand that may be big in one country and you can just tack it on to the to the e-dreams's back end. But I don't know. They haven't disclosed it. But I knew that they did disclose that they were in talks with a couple companies. And maybe the regulators stopped it.

And that was probably a good thing for them. They had also implemented a share buyback program. And the company has a history for being extremely conservative. I mean, they have, they've given guidance for fiscal year 25, but that's the only guidance that they did get given. And, you know, historically, they like to under promise and over deliver on the capital allocation, they should be buying back stock today. I mean, they have cash on the balance sheet. They do have some debt, but looking at where the stock price is at and how. stable this business is and how easy it is to predict the growth rate of it, they should be

buying back stock today. I think that they want to get through calendar Q4, which is a heavy cash use period for them from a working capital perspective. And then as that working capital unwinds in Q1 next year, they'll start to buy back stock. I mean, I hope they do it. I hope they start doing it today. If they don't do it today, you know, we're four months out. So I, you're not going to see them doing any any acquisitions in, in my opinion, because they've proven out prime and prime is going so well. Their, their capital is being spent on growth, and that's pretty much spent in IT. You can see it in their CAPEX numbers because they're allowed to write up, you know, right up, capitalize some of their IT spin.

And so the rate of that is being driven by their ability to hire and training and get people working on new projects. And so their capital is going to be going towards getting hotels to a point where they're ready to do a hard launch. And then after that, geographic expansion. And then beyond that, the only thing that they have to do is pay down debt, but why would you do at this point? They hit the locked-in some debt at 5%, which is cheap, and then return capital to shareholders,

and hopefully they do that via sherry purchases. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you.

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I think we hit everything that I wanted to hit at actually. So I just want to ask you, you know, we talked about a lot. There's a lot to talk about, again, this is fascinating. I'm going to be researching it a lot over the next few weeks. I can see why you and a bunch of smart friends are in it. But there is a lot to think about here. Is there anything else you want to leave listeners kind of thinking about or that they should be exploring if they continue to kind of look at e-dreams or dive deeper into it?

Well, I would just say, like, is always like thinking about the risks. You know, there are certainly some black swan events that could affect it. I mean, if, you know, Russia used nuclear weapons in Ukraine, I would certainly, you know, put a damper on travel for a bit. For a bit. Once the missiles start flying, I kind of discount it because I guess if it was limited to Ukraine, that's fine. But once the missile start flying, like, oh, you know, probably got bigger things to worry about

than the nuclear apocalypse of my portfolio. But year over year in COVID, the revenue went down 80%. And this company was able to survive, mostly because their cost structure at the time, 75% of it was variable. It's a little bit higher than that now. And so I don't think that they're, I think they can survive a lot of headwinds. I mean, right now you have a slow down in Europe. You've had massive inflation. You've had COVID popping up here and there.

and they've grown the program program from one million members to five. And so I feel pretty comfortable from a business durability perspective. Like the one risk I have is that, or the one risk that concerns me the most is that if the valuation gap between like its current trading price and its intrinsic value, it doesn't close, the investors, you know, may push for a sale. And if that happens, you know, maybe they get taken out for 15 or 20. the euros, which would be a good outcome relative to the 650 stock price today. But I think it would definitely leave way too much money on the table for the public market investors. I always do laugh

a little bit to myself when one of the risk factors is, hey, you know, if this got taken out up 150% from today's share price, I'd be furious. I'm kind of like, you know what? I'd probably take anything up 150. What do you think the prime program membership tops out at, though? I mean, it's not going to be seven. I don't think it's going to be 14. You know, that's another, one last question on this. It is another interesting question I had. So one of the things they said is, hey, in our biggest markets, which I think is France is their biggest market. Yeah, 4.6% penetrated. You mentioned that earlier, 4.6% penetrated, which is, that's enormous, right? Like, I remember before Netflix, every subscription service in the U.S. would top out around 30 million members,

which is about 10% of the U.S. population. People can check me. I'm directionally right on that. Like, that was before Netflix, but 10% is a lot. 4.6% for a travel program. Like, there are people who don't like to travel. If I subscribe, my wife might not need to. My kids certainly don't need to. You're very retired, no longer travel parents don't need to. Like, 4.6% is a lot.

And look, if they can do 5% of the entire European population, like, huge. But I wonder where it tops out in a country, you know? Yeah, it's not 4% of the French population. It's 4.6% of, like, unique travelers or unique bookers. I feel really dumb saying that now because they would have way more prime members if they were, I feel really stupid. But part of what I just said held, so we won't cut it out and I'm fine being stupid. So it's 4.6% of unique travelers in France. Right.

Yeah, unique bookers. How many people, unique bookers on e-dreams or unique bookers overall? Oh, I don't know. I'd have to go back and check it. They've got it. When they've put together, I mean, you have to go back a couple years. I think they dropped like what their TAMs. is, and it was, you know, based on, like, unique bookers.

I just, I'd have to imagine that it's more than 4.6% of their unique bookers just because so much of their revenue is coming from the prime program now, but, yeah, anything else people should be thinking about? No, I think, I think that's it. This was fantastic, man. Again, I was calling people all day yesterday trying to get smart right, because I'm with you. Like, there is this skeptic in me that says, hey, we've seen this with TripAdvisor, no one's done this before.

but then there is the proof is in the pudding and it does seem like they're they're starting to hit the acceleration as you said if they're starting to the acceleration like it's not stopping at 7.25 and 180 million cashie but uh they're going to get hotels they're going to start getting you know no one's ever been able to craft the how do we get experiences itself into a membership but if they can start getting experiences even if it's not fully into the membership but you could imagine it it could be absolutely enormous and uh yeah you know 20, 20 would not be the end of things. I did a little traveling this summer in Europe. And I booked my flights to and from Europe kind of directly with the airlines. I had some points, so that helped. But within Europe, on the hotels, particularly, I think on my first leg of the trip in London, I used the Marriott Hotel. But after that, I used E-Dreams, and it was fantastic.

and I was able to book it on the app. And aside from that, I was able to book airport transfers transportation very easily on the app, which made it quite convenient. So if you can throw excursions in there too and book it in app and have one place to go and have one place to kind of track your itinerary,

I think that makes it super convenient. Going back to like the benefits of Amazon and Prime, like make everything convenient for the traveler. And if Eddreams can do that via their app, then, then the one location is great, but the other great thing about experiences is it is the most fragmented thing. And it's, you know, if you hit somebody with an advertisement at the right time, they're very likely to book. So the advertising rates and everything are off the charts.

And you could imagine in a prime membership, they say, hey, you know, you can book, I love escape rooms. I'm sure you know, I love escape rooms. You can book this escape room. It's $30 to book. They would pay us $10 in community. mission will pass all that $10 on to our prime membership or maybe eight of the $10 onto our prime membership so you can book this escape room cheaper than you can anywhere

else because of that like you could see the huge win-win hit the customer at the right time they get an experience they love cheaper than they can get anywhere else e-dreams gets a little bit of margin there and for the for the escape room they get a customer that they wouldn't have ever they wouldn't have gotten a very competitive customer so you that you know again if you start thinking about e-dreams 3.0 4.0 like you can just really start seeing the unlock there I would say, I mean, it's interesting at the same time. The stock is egregiously cheap. The shareholder base right now is, you know, there's some high quality shareholders in it.

There's one large shareholder that needs to start to get out over time. And so as the price moves up, you may see some shares unlock, which I think would be a good thing and, you know, increase the liquidity in the stock. They're at the Goldman Sachs Communicopia Conference today. They were invited there by the OTA analyst. Does that mean that Goldman may start covering them? I don't know, but it's a good sign. They should be buying back stock shortly. They should do a hard push into hotels.

I think once the hotel's news comes up, and you'll probably see a new analyst day. The last analyst day they had was November of 21. And so there's a lot of good news coming up in the stock, I think. Yeah. And you can imagine an analyst day where they push their targets further than 2025. As you said, they started giving more details on how they're cutting into hotels and how that's going to inflect the business further.

You can imagine all that. Cool. Well, anyway, Chad, I've got a hop, but this has been fantastic. Again, just a fantastic idea. I find it so interesting. Really appreciate you coming on for the second time. And I know there's one we've talked about offline. I'm hoping to have you on it for a third time at some point in the near future to talk

that one. I think I get a half. this time is a second time guess. I'll be looking for that in the mail. Don't spoil it for the other people, but you are right. Second time guests get the exclusive hat. So, all right. Talk to you soon, Chad. Have a good day. A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.