Premium Service Launch and Earnings Momentum Will Offset Multiples Risk Ahead

Key Takeaways

• Optimism around premium offerings, digital transformation, and autonomous vehicle partnerships may overstate sustainable revenue growth and margin expansion due to significant execution and market risks.
  
• Long-term demand could be structurally limited by shifts toward alternative mobility solutions and increasing competition in premium segments, heightening downside risk to future profit expectations.
  
• Strategic focus on premiumization, partnerships in autonomous mobility, technology innovation, disciplined investment, and favorable industry trends positions Avis for sustained revenue growth and margin expansion.

Catalysts

Provides car and truck rentals, car sharing, and ancillary products and services to businesses and consumers in the Americas, Europe, the Middle East and Africa, Asia, and Australasia.

• The launch and rapid scaling of Avis First, a premium rental offering, could be fueling expectations of significant revenue and margin expansion, as investors anticipate a sustained uplift in average revenue per day (RPD) and market share capture from price-insensitive travelers; this optimism may not fully account for competitive responses or changing customer preferences, increasing the risk that future revenue and net margin improvements fall short of current valuations.
  
• The partnership with Waymo and stated ambitions to become a core fleet and asset manager for autonomous vehicles is stoking future growth narratives, with investors projecting Avis will capture a sizable share of vehicle miles traveled (VMT) in the autonomous mobility ecosystem, leading to long-term revenue and free cash flow expansion that may not be realized if AV adoption or partnership economics disappoint.
  
• Current enthusiasm for digital transformation and technology-enabled fleet management (including data-driven pricing and concierge experiences) may be leading the market to overestimate sustainable margin improvements, given execution risks, potential capital intensity, and the pace of competitive digital disruption, all of which could pressure net margins if cost or adoption targets are missed.
  
• The market may be overlooking long-term headwinds from shifting mobility habits, such as ride-hailing, micro-mobility, and reduced car ownership in urban centers, which could structurally cap rental volume growth and limit upside to both top-line and earnings if alternative mobility solutions continue to gain traction.
  
• The stock could be pricing in industry-wide premiumization and differentiated service trends as if they will structurally expand the total addressable market (TAM) and margins for Avis, without sufficiently factoring in potential margin compression or price competition as rivals launch competing premium offerings, creating downside risk to long-term profit expectations.

Avis Budget Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avis Budget Group's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -19.0% today to 8.3% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $8.87) by about July 2028, up from $-2.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.7x on those 2028 earnings, up from -3.2x today. This future PE is lower than the current PE for the US Transportation industry at 26.3x.
• Analysts expect the number of shares outstanding to decline by 1.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Avis Budget Group Future Earnings Per Share Growth

Risks

• The launch of Avis First, a premium product offering, targets the structural industry shift toward premiumization seen in airlines and hotels, positioning Avis to capture higher-margin customers and raise average revenue per rental; this differentiation could lead to improved revenue growth and net margin expansion over the long term.
  
• The recently announced partnership with Waymo (Google's autonomous vehicle division) leverages Avis's core competencies in mega fleet management, asset deployment, EV infrastructure, and global reach, allowing Avis to participate early in the burgeoning autonomous and electric vehicle (EV) mobility market; this positions Avis to potentially unlock new, rapidly growing revenue streams as the addressable mobility market expands.
  
• The company is actively investing in technology upgrades and digital innovation-such as new operating systems, app-based customer experience, and advanced data analytics for fleet optimization-which enhances operational efficiency, boosts customer satisfaction, and provides the scaling foundation necessary to compete with ride-hailing and mobility platforms, supporting stronger long-term earnings.
  
• Avis management highlighted a disciplined, free cash flow-focused approach to growth investments, using existing cash-generative core operations to seed new ventures; this lowers execution risk and supports the sustainability of net income and free cash flow, even as the company invests in structural growth.
  
• Broader secular trends such as sustained growth in travel and tourism, urbanization (with declining personal car ownership), and the electrification of vehicle fleets support long-term demand for short-term mobility solutions and reinforce Avis's strategy to grow TAM, all of which could result in durable top-line expansion and margin enhancement over the next decade.

Valuation

• The analysts have a consensus price target of $125.0 for Avis Budget Group 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 $196.0, and the most bearish reporting a price target of just $87.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.2 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 5.7x, assuming you use a discount rate of 11.6%.
  
• Given the current share price of $203.88, the analyst price target of $125.0 is 63.1% 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.