I know it's a preposterous idea but I believe Travelzoo (TZOO) could return to old highs of $100+ a share. The company appears to be languishing here in the low $20's/high teens as revenue growth has left the building in a hurry. However, I believe the company is laying the groundwork for significantly higher prices.
Since my prior article, "Is Travelzoo A Buyout Candidate?" the stock is up about 10% after reporting another quarter of average revenue growth, yet solid cash flow generation. In the report and the conference call, the company talked at length about some areas that really get me excited about the company.
In my prior article I stated that one issue I had with their website that I saw right off the bat was if I'm there and let's say I'm looking for a good deal on a hotel in a city and I find a place I'd like to book with but the hotel doesn't offer a deal for the date I want to travel, I have no way of booking with that hotel. That's a major problem. Through Travelzoo, I can do a search and see rates from HotelPlanner.com, Orbitz (OWW), Booking.com, Expedia (EXPE), etc; however, I still don't have an easy way of booking a room with that hotel for the dates I need. Not only does this increase the likelihood of a user leaving the site but it also reduces the potential commissions and future revenues TZOO can generate from users. This latest quarterly report addressed this issue at length.
The CEO acknowledged that a major weakness with their current mobile platform is that with mobile they can't pass on a discount code in a URL on to another site. This means that if someone wanted to book a deal right now with a hotel and there is a coupon code attached to the deal, the only way someone could take advantage of the coupon code is by calling the number listed on the deal and booking it over the phone. This is a major problem and is causing significant "leakage" (i.e., users leaving the site/app out of frustration and going to a competitors site).
Additionally, some hotel deals link directly to hotel websites that might not be optimized for smartphones and therefore rendering the mobile user out of luck when trying to book a deal.
TZOO recognizes the significance of this issue and has begun developing a hotel booking platform that will allow customers to book on mobile apps and, most importantly, allows hotels to update offers electronically by logging into the platform, as opposed to the current method of having to manually update offers by phone with TZOO. This is a major advancement that the market, in my opinion, hasn't really caught on to. This platform is expected to be operational by Q3 2013 and I believe it will be a significant growth driver.
As I mentioned in my prior article, TZOO is currently doing a very poor job monetizing the traffic they are getting. Between not having a hotel booking platform and only allowing customers to do business with vendors on days when their local deals or offers are allowed, they are losing a good deal of business. This was the reason why I considered TZOO to be a buyout candidate. They are generating more than half the traffic of Kayak (KYAK) yet they are trading for 1/5 the price.
In terms of valuation, the company trades at a huge discount to their peers: a P/E of 15 vs an industry wide average of 25; a price to free cash flow of 12 vs an industry wide average of 22; and a price to sales average of 2 vs an industry wide average of 4. Included in their industry are KYAK, TripAdvisor (TRIP), Priceline (PCLN), OWW, and EXPE.
The company in its most recent quarter reported some very impressive growth figures in mobile: 1/3 of all traffic now comes from mobile, mobile app downloads increased 427% year on year and Facebook (FB) fans increased 274%. The company began adding additional photos to top 20 deals and added Facebook feedback on each deal that increases the stickiness of deals and sell through rates on vouchers. Sell through rates increased 12% and click through rates increased 14% as a result of these changes.
What is also impressive is that they were able to grow revenues in Europe 10% in a period of significant weakness in Europe and they grew their revenues on hotel getaway deals by 50%, resulting in $1.3 million sequential growth in their "travel" segment. This is at a time when there was no hotel booking platform in place.
By the end of the year the hotel getaways deals numbers could be pretty staggering as the hotel-booking platform is rolled out. The company is still a top 10 travel website in the US and has a pristine balance sheet: $61.2 million in cash and no debt. Should the hotel booking platform be a success in monetizing the traffic that leaks from there site, I believe investors will scramble to get back into TZOO and I think there is an outside chance the stock could rally back to old highs within the next year. The company has been buying back stock rapidly - they repurchased $7.9 million in Q4 alone and shares have shrunk about 10% over the past year. With the new hotel booking platform I believe the company can begin to show meaningful revenue growth and EPS growth of at least 20% and could do a $2 EPS run rate or more by Q3 or Q4 2013. If that should happen then I believe investors could pay 40 to 50 times earnings as they see tangible signs of traffic monetization.
Additionally, I think Yahoo (YHOO) or another online travel agent would be smart to buy the company as it currently trades at roughly half the industry average on several different valuation metrics.
Disclosure: I am long TZOO.
Additional disclosure: After reading the earnings report and listening to the most recently conference call and knowing the story very well, I have decided to take a position after the earnings call at around $21. I may add more shares on weakness.