Local Teams And AI Will Improve US Hospitality Amid Headwinds

Key Takeaways

• Decentralization may boost efficiency but risks uneven decision-making, affecting revenue consistency across regions.
  
• AI adoption can streamline operations, but integration challenges could increase costs and impact margins.
  
• Localization, AI-driven service improvements, and strategic home targeting could boost Vacasa's operational efficiency, customer satisfaction, and revenue amidst industry challenges.

Catalysts

Operates a vertically integrated vacation rental management platform in the United States, Belize, Canada, Costa Rica, and Mexico.

• Vacasa's strategy to decentralize operations and empower local teams is expected to enhance efficiency and guest experiences. While this could improve operational efficiency, it also risks uneven management and decision-making, potentially impacting revenue consistency across regions.
  
• The ongoing industry headwinds, including softer demand for domestic non-urban vacation rentals and increased supply, may continue to pressure gross booking value per home, leading to potential declines in future revenue and profitability.
  
• Early adoption of AI tools aimed at improving homeowner and guest services could streamline operations and reduce costs, but technological integration challenges could lead to higher-than-expected expenditures, affecting net margins.
  
• Vacasa's efforts to refine sales approaches to focus on homes with key amenities could positively impact future revenue. However, this selective growth strategy might limit the speed of expansion in available properties, affecting long-term revenue growth.
  
• Elevated homeowner churn rates due to dissatisfaction with rental income and market dynamics could hinder Vacasa's ability to maintain and grow its portfolio, thereby impacting future earnings and financial stability.

Vacasa Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vacasa's revenue will decrease by 2.6% annually over the next 3 years.
• Analysts are not forecasting that Vacasa will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Vacasa's profit margin will increase from -10.5% to the average US Hospitality industry of 7.2% in 3 years.
• If Vacasa's profit margin were to converge on the industry average, you could expect earnings to reach $60.8 million (and earnings per share of $2.25) by about April 2028, up from $-95.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 1.5x on those 2028 earnings, up from -0.9x today. This future PE is lower than the current PE for the US Hospitality industry at 22.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.68%, as per the Simply Wall St company report.

Vacasa Future Earnings Per Share Growth

Risks

• Vacasa's focus on localizing decision-making and empowering field teams could lead to improved operational efficiency and enhanced guest experiences, which may positively impact their revenue and profit margins.
  
• Efforts to refine the sales approach by targeting homes with higher guest appeal and revenue potential, such as those with key amenities, might enhance gross booking values and thereby potentially improve revenue and net margins.
  
• The use of artificial intelligence to improve service outcomes and resolve issues faster may lead to cost savings and better customer satisfaction, positively influencing Vacasa's earnings.
  
• Despite market headwinds, Vacasa's listings are reportedly generating more gross bookings per home than the industry average, suggesting potential resilience in revenue and profitability as industry conditions normalize.
  
• Early bookings for the first quarter are currently outperforming previous year benchmarks, indicating a possible uptick in demand which could strengthen revenue and adjusted EBITDA despite the current booking volatility.

Valuation

• The analysts have a consensus price target of $2.5 for Vacasa based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $840.4 million, earnings will come to $60.8 million, and it would be trading on a PE ratio of 1.5x, assuming you use a discount rate of 10.7%.
• Given the current share price of $5.39, the analyst price target of $2.5 is 115.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.