Travelzoo (NASDAQ:TZOO) is a leading global Internet media company that allows travel, entertainment and local businesses to market and sell their services to its vast 26 million subscriber base. With the introduction of the hotel booking option on its websites this year in March, the company has marked a shift from its existing business model. The hotel booking platform enables users to book hotels directly via Travelzoo’s website or through mobile products, thus also allowing suppliers to promote deals in a more flexible manner; e.g. loading a last minute rate for a hotel has become much easier compared to Travelzoo’s previous solution, which redirected users to the hotel’s website.
The hotel feature benefits all the three nodes in the ecosystem—the hotel, the user and Travelzoo. Here’s why the product is advantageous for each of them:
1.) The User: The platform benefits users in four ways. First, they can now book rooms in 500 plus hotels at anytime of the year. Earlier, they could not choose where and when they wanted to go, and had to accept the places and dates that were offered to them by Travelzoo. Second, they can book full-price hotels with the service. Earlier, users could not book full-price hotel stays because Travelzoo offered only discounted deals on certain hotels. Third, the platform has made booking via mobile much easier since the booking is completed on Travelzoo’s website itself and users are not redirected to the hotels website, which sometimes creates hand-off issues. And fourth, users do not have to tackle the hassle of always buying vouchers. (Sources: First Quarter 2014 Performance and Growth Strategy Overview; Travelzoo's CEO Discusses Q1 2014 Results - Earnings Call Transcript)
2.) The Hotel: Many hotels could not participate on Travelzoo either because they were unable to operate under the voucher model or they did not want to run advertisements for discounted deals, but preferred a commission based model for transactions. With the launch of the platform, hotels have the option of selling full-price stays under the commission based model. Hence, it enables them to make more business compared to the earlier solution which gave them scope to sell only off-season deals for one to four weeks in a year.
3.) Travelzoo: Prior to the introduction of the platform, Travelzoo was unable to take advantage of the peak season demand since it only offered off-season deals. Hotel prices are much higher during peak seasons than in off-seasons, and thus also generate higher commissions. Further, many hotels used to limit advertising activity since their budgets are fixed. For instance, a hotel in New York would only advertise in the Northeast United States. The booking platform is attractive to such advertisers since they can choose to pay commissions instead of paying advertising fees to Travelzoo.
Results From The Beta Test Are Encouraging
Travelzoo’s hotel booking platform is currently available to VIP members only. The company has introduced about 200,000 members to the hotel platform. Of the subscribers who booked during the test period 84% had never purchased a Getaway deal on Travelzoo in the past. The Getaway deals usually include a night or two at a hotel or resort within a two-hour drive or short flight from subscribers’ homes and include a fine dining experience or resort credit, plus other extras. Travelzoo’s robust growth in its hotel business so far has been primarily driven by the launch of its Getaway hotel offering in 2011.
Many other metrics suggest that the hotel platform is a good bet. First, the average hotel-related revenue per subscriber for the one-month test period was $54, about 300% higher than the full-year average for 2012 and 2013. Second, of all hotels booked via the platform 46% were full-priced deals. And third, 56% of the participating hotels had not run any deals on Travelzoo before the platform’s launch because they were unable to operate under the voucher or advertising model.
We believe that Travelzoo’s entry in hotel bookings is a good long-term strategy as it opens up an additional revenue opportunity for the company. Additionally, the platform could help stabilize the decline in take rates that the company has been witnessing for the past several quarters. For a detailed analysis of the benefits of the hotel platform, read our article: Travelzoo’s Hotel Booking Feature Can Help Drive Big Growth.
Our price estimate of $21.33 for Travelzoo marks our valuation at a premium of over 15% to the market price of the stock.
Disclosure: No positions