Inspirato: A Luxury SaaS Traveling Company With Clear Growth Runway (NASDAQ:ISPO)

Investment Thesis

Inspirato (NASDAQ:ISPO), a luxury vacation rental company, went public this year through a SPAC deal with Thayer Ventures. Right after the SPAC merger, the stock spiked up over 10 fold to $108 amid a squeeze but quickly plummeted afterward and is now trading at $5.83, around 95% below its all-time high. The company specializes in the luxury travel area and provides exceptional luxury travel experiences with superior service. Unlike most other vacation rental companies such as Airbnb (ABNB) and Marriott (MAR), the company operates with a subscription model. As lockdowns around the world ease and borders are starting to re-open, demand for traveling is sky-rocketing. Which provides a massive tailwind for vacation companies like Inspirato. The company’s subscription model differentiates itself from peers and provides more stability for its revenue. It also recently entered the luxury real estate market which will open up more revenue streams. After the drop, the company is trading at a compelling valuation and I believe it is a buy at the current price.

How is Inspirato different?

Unlike most other vacation rental companies, the company operates with a subscription model. Customers need to subscribe to Inspirato’s service in order to enjoy any of its accommodations and facilities. It also solely targets the high-end market with wealthy customers as its target audience. The luxury travel industry is huge. According to Inspirato, the TAM (total addressable market) for high-end travel is expected to grow from $135 billion in 2019 to $230 billion in 2025, representing a 9% CAGR (compound annual growth rate). Strong tailwinds from post-Covid traveling may further accelerate the growth rate.

Inspirato has a few segments to its business. This includes the Inspirato Pass, the Inspirato Club, and Inspirato Real Estate. Inspirato Club and Inspirato Pass are two subscription products that the company offers. Inspirato Club allows members to enjoy access to the full Inspirato Collection of exclusive homes, hotels, resorts, and experiences. This includes 365+ residences, 500+ hotels, and resorts in 80+ different destinations. Nightly rates are paid daily when they travel. It has an enrollment fee of $600 and a monthly subscription fee of $600. The Inspirato Pass has an enrollment fee of $2500 and a monthly subscription fee of $2500 with no nightly rates, taxes, or fees. Inspirato Pass has all the benefits above plus personalized service, with pre-trip planning, on-site concierge, and daily housekeeping. A dedicated Care team will help pass holders choose their trips, connect them to local experts and let them know about new properties and destinations.

I believe the company is operating smartly. It is able to differentiate itself by targeting the high-end market with a subscription business model. The travel industry is very seasonal therefore travel companies’ revenue usually fluctuates a lot. However, a subscription model allows Inspirato to have a much more stable revenue recurring revenue stream. Besides, high-end customers also tend to travel and spend a lot more compared to the average customers, which significantly boosts the company’s service revenue. Customers will also have stronger loyalty when subscribed to the service which leads to a much higher customer retention rate.

Inspirato also launched Inspirato Real Estate, a service that allows buyers and agents to buy, sell, and manage luxury real estate. Buyers are able to purchase a property and let Inspirato help run it and rent it out to pass holders. Agents are able to find buyers easily for their luxury properties by leveraging Inspirato’s existing customer base. This opens up a new revenue stream for the company by expanding into the high-end real estate market.

Financials and Valuation

The company posted strong numbers in its latest quarterly earnings. Total quarterly revenue is $82 million, an 67% increase YoY (year-over-year) from $49 million. Subscription revenue and travel revenue are $32 million and $50 million, up 50% and 79% respectively. Active subscriptions are approximately 15,300, up 18% from 13,000. Subscription for Inspirato Pass (its high-end subscription) increased to 3300, an 82% increase. Annual recurring revenue increased to $147 million, representing an increase of 57% YoY. For the quarter, the total nights delivered is approximately 43,000, an increase of 46%. 67% of customers have an income of $250k+ which provides huge upsell opportunities.

A higher subscription revenue mix also drove up gross margins, increasing from 35% last year to 43%. Like most growth companies, Inspirato is still operating at a loss as it is investing heavily in expanding its portfolio and S&M. I believe the company will be able to improve its profitability relatively quickly as costs for infrastructure will slow down over the years while subscription revenue continues to increase. The company’s balance sheet is very healthy with $80 million in cash and only $13 million in debt. Revenue for the full year of 2022 is expected to be around $350 million to $360 million, representing continued strong revenue growth of 52%.

Web Neighbor, CFO, on company’s Investments

“Our record increase of 115 Controlled Accommodations added in the first quarter demonstrates our team’s ability to deliver on the investments we’ve made in people and infrastructure over the past year. We are excited to continue to expand our offerings to provide an even better portfolio of first-class vacation options for our subscribers.”

The company is currently trading at a price-to-sales ratio of 2.27. This is quite compelling for a company growing top line at 50%+. From the chart below, you can also see that its valuation is significantly lower than other traveling companies like Airbnb and Bookings.com. Both these companies are obviously much more established with higher margins but Inspirato is operating with a different approach and it is leading to strong growth. As the portion of subscription revenue continues to increase and the company scales further, I believe the margins will expand to levels closer to other traveling companies. Therefore I believe the current valuation is cheap as the company has a clear growth runway ahead.

Risk

The company is facing competition from other traveling companies as hotels like Hilton (HLT) and Hyatt (H) are also providing luxury stays for customers. They might take away some market share but I believe Inspirato has a unique moat. Unlike traditional hotel chains, most of Inspirato’s offerings are curated and unique. It takes time to build or acquire these properties which gives Inspirato a competitive advantage. There are also a lot of discussions about whether a recession will happen soon as inflation is at very high levels while supply remains blocked amid China’s zero COVID policy. However, I believe Inspirato is relatively immune to these risks. The company’s customer base is people with very high disposable income therefore their purchase power is likely to remain strong despite an economic downturn and will continue to travel. Also, having a subscription business model provides resilience during a downturn as part of these revenues are recurring and paid upfront. Unlike some re-opening trades like Airline companies, it is also not exposed to any price increase in commodities.

Conclusion

In conclusion, Inspirato is a business with strong potential in my opinion. The company is taking a differentiated subscription approach which allows it to increase customer loyalty and have a steadier revenue stream. The high-end luxury travel market is huge and will surely benefit from countries reopening. Their high-income customer base with strong spending power provides resilience during economic downturns. It is also expanding into the luxury real estate market which will expand its TAM and open up new revenue streams. The company is seeing strong growth across all different metrics and its guidance suggests it is likely to sustain high growth rates throughout the year. The current valuation is compelling when compared to peers especially after factoring in its growth rate. I rate the company as a buy at the current price as it has an intriguing prospect and a clear growth runway with margin expansion opportunities ahead of them.