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Why the Webjet Limited share price is soaring to record highs today

The Webjet Limited (ASX: WEB) share price is taking off today as one of the local market’s best-performing shares over the last couple of years hits another record high thanks to the growing strength of its digital travel businesses.

After some almost out-of-this-world performance the company was added to the S&P/ASX 200 (Index: ^AJXO) (ASX: XJO) index of Australia’s leading companies in December 2016.

Since then and over 2017 it has climbed 17% to hit $12.42 this afternoon which is probably partly a result of index-tracking passive fund managers and exchange traded funds being forced to buy the stock as part of their mandates to hold every constituent of an index such as the S&P/ASX 200.

Still, it’s the explosive profit growth of the underlying business that is mainly driving share price gains of 100% over the past year and 356% over the past three years, with Webjet’s business-to-business platforms delivering a compounded annual operating income growth rate of 30%. While its consumer-facing platforms (including its flagship Webjet bookings site) are delivering compounded annual operating income growth rates of greater than 10%.

Not bad for a business labeled obsolete by critics a few years back due to the belief that consumers would avoid its services to book directly with airlines or hotels themselves.

Many of the critics of Webjet’s consumer-facing businesses also missed the rise of its business-to-business (B2B) platforms that include Europe focused Sunhotels, Middle East and Americas-focused Lots of Hotels and Asia-focused FIT Ruums.

These platforms act as intermediaries in the distribution of hotel rooms between the hotels and travel agents commonly looking to block book for tour groups, or on behalf of individuals. Webjet has even recently claimed that it has developed blockchain-based distributed ledger technology that will deliver an even better service to its B2B platforms’ users.

Outlook

I wrote multiple times over the last 24 months that Webjet shares looked a buy for growth-oriented investors and its management is still reporting blockbuster growth rates in 2017, with a forecast for full financial year 2017 EBITDA of $80 million.

The group has also been on an acquisitive trail recently with the acquisition of Online Republic contributing to total debt of $55 million, although this looks manageable at around 0.6x forecast EBITDA.

Clearly Webjet faces competitive risks and carries some debt, although given its underlying growth rates and high-performing management team you won’t catch me selling shares anytime soon. On current valuations I would rate the stock a hold, although if it sheds 10% or more between now and August 2017 I would be a buyer of shares.

Other online phenomenons such as Expedia or Flight Centre Travel Group Ltd (ASX: FLT) give an idea of the potentially long growth runway ahead for it.

The digital economy has also provided some of the ASX’s very best-performing growth stocks over the last 10 years, such as REA Group Limited (ASX: SEK) and Carsales.com Limited (ASX: CAR), up 990% and 202% respectively over the period. This goes to show why it pays to focus on the best stocks in a digital economy growing multiple times faster than the wider Australian economy, with Webjet looking one of the best in the digital sweet spot.

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Motley Fool contributor Tom Richardson owns shares of REA Group Limited and Webjet Ltd.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of Flight Centre. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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