Costly AI Investments And Unsustainable Revenue Growth Threaten Profitability

Key Takeaways

• Growing AI investment and international expansion may increase costs, potentially compressing margins despite improved customer experience and increased revenue.
  
• Projections of sustained revenue growth might be overestimated due to temporary favorable conditions and increased customer acquisition costs.
  
• Robust revenue growth driven by outperformance, macroeconomic trends, international expansion, tech investments, and financial stability positions the company for strong earnings momentum.

Catalysts

An online travel company, sells travel products and services in India, the United States, Southeast Asia, Europe, and internationally.

• Projected economic growth in India, especially becoming the world's third largest economy, combined with a burgeoning middle class, is expected to drive higher discretionary spending on travel, leading to potential overestimation of future revenue growth for MakeMyTrip.
  
• The expansion of MakeMyTrip’s AI-driven personalized recommendations and GenAI chatbot could be expected to improve customer experience but may also significantly increase costs due to continued investment in AI technology, potentially compressing net margins.
  
• The ambition to enhance direct hotel contracting in international markets may imply increased operational costs to support these expansions, potentially pressuring earnings despite incremental revenue growth prospects.
  
• Rapid growth in the international air ticketing business, outpacing industry benchmarks, might be resulting from temporary favorable conditions rather than long-term sustainable factors, potentially leading to projections of unsustainable revenue growth.
  
• The introduction of new product features, partnerships like the co-branded credit card with ICICI Bank, and expansion into international markets could increase customer acquisition costs and pressure profitability metrics despite potentially bolstering revenue figures.

MakeMyTrip Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MakeMyTrip's revenue will grow by 20.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.1% today to 14.2% in 3 years time.
• Analysts expect earnings to reach $211.0 million (and earnings per share of $1.98) by about October 2027, down from $219.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 73.5x on those 2027 earnings, up from 51.5x today. This future PE is greater than the current PE for the US Hospitality industry at 23.1x.
• Analysts expect the number of shares outstanding to decline by 1.03% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.08%, as per the Simply Wall St company report.

MakeMyTrip Future Earnings Per Share Growth

Risks

• Strong growth in both gross booking value and adjusted operating profit indicates robust revenue and earnings momentum, driven by continued industry outperformance and supply side expansion.
  
• India's economic growth and increased discretionary spending on travel and tourism present favorable macroeconomic conditions, potentially boosting revenue and profit margins for the company.
  
• Growth in international air ticketing and hotel outbound business suggests significant revenue opportunities as international markets expand, evidenced by substantial year-over-year revenue growth and margin contribution.
  
• Strategic investments in technology and AI, such as Myra, enhance customer experience and operational efficiency, positioning the company for sustained earnings growth due to improved conversion rates and cost savings.
  
• Strong cash position and commitment to opportunistic buybacks indicate financial stability and potential returns to shareholders, which may support earnings per share growth.
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Valuation

• The analysts have a consensus price target of $109.67 for MakeMyTrip based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $120.0, and the most bearish reporting a price target of just $74.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.5 billion, earnings will come to $211.0 million, and it would be trading on a PE ratio of 73.5x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of $102.99, the analyst's price target of $109.67 is 6.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.