The Webjet Limited (ASX: WEB) share price has continued its decline and is dropping lower again on Tuesday.
In morning trade the online travel agent’s shares are down 2% to $2.90.
This latest decline means that Webjet’s shares have now tumbled approximately 40% from their June high.
It also means the company’s shares are now trading within sight of their March low of $2.25.
Why is the Webjet share price sinking lower again?
It appears as though investors have been selling Webjet’s shares over the last few weeks for a couple of reasons.
The first is valuation concerns. Due to the dilution caused by its sizeable capital raising at the height of the pandemic, when Webjet’s shares were closing in on $5.00 in mid-June, its market capitalisation was on a par with pre-pandemic levels.
This was despite its shares trading nearly two-thirds lower than their 52-week high of $14.63.
I suspect that some investors were not initially factoring the dilution into the equation when valuing Webjet’s shares and may have started to sell them once this was better understood.
In addition to this, the spike in coronavirus cases in Victoria is likely to be weighing heavily on Webjet’s shares.
With Melbourne in lockdown for upwards of six weeks and concerns that the virus could spread elsewhere, the recovery in the domestic travel market could be derailed.
While Webjet appears to have sufficient liquidity to last it until the end of 2021, if the pandemic goes on longer than expected, it could potentially require additional funding next year. This would likely dilute shareholders further.
And even if another capital raising proves unnecessary, the longer this drags on, the less funds the company will have available to make potential acquisitions.
Should you buy Webjet shares?
Despite the recent pullback in the Webjet share price, I’m not in a rush to invest. I would suggest investors keep their powder dry and wait to see how travel markets recover over the next 12 months before considering an investment.
The same applies to rival travel bookers Corporate Travel Management Ltd (ASX: CTD) and Flight Centre Travel Group Ltd (ASX: FLT).
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited and Webjet Ltd. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. 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 Scott Phillips.
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