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I'm compelled at my initial findings on this idea and wanted to share. As many of you know, there is a phenomenon known as Groupon that has been sweeping the nation and is now moving into other countries as well. For those unfamiliar, what Groupon does is negotiate one really great deal in your city each day at a huge discount (normally 30-90% off) and send it to you in a nice morning e-mail. These deals may be for local restaurants, spas, or fun activities. Along with Groupon, which is in over 100 cities, there have been many copycat services like LivingSocial, BuyWithMe, etc. (Shameless plug: a couple of friends run a great site called Yipit.com that aggregates all of these daily deals in several cities and sends you ones based on preference of the types of deals you like, go sign up)

The business model is not too difficult to set up as long as you have some tech savvy to create a website and can devote the time of at least one person to pound the pavement and find businesses that want to do the deals. The businesses win because they get new customers they may not have otherwise gotten, the Groupons of the world win, because they get a cut: 50% of the face value of the coupon. That's right, 50% for negotiating the deal and posting it on a website.

I'm simplifying it quite a bit, but the bottom line is that it takes very few bodies to get the deals negotiated and the margins are HUGE. Past paying people to find deals and keeping the lights on, the cost structure is not very burdensome and you can make a ton of money, which is why recently, Groupon raised a round of venture capital that placed a $1.35Bn valuation on the company (see her)...that's right, BILLION. According to stats, Groupon reaches around 18 million people via their daily e-mail. and has over 100 deals running a day.

As I said, the low barriers to entry have brought a lot of entrants into this space and now a few publicly traded companies have gotten into the peddling of daily deals as a new revenue source and to reach additional customers that may use the site for other reasons once they are there. Travelzoo (NASDAQ:TZOO), OpenTable (NASDAQ:OPEN), and The Knot.com (KNOT) are the notable entrants that have launched in several cities. While they have only been in this business line for a month or so, their results have already proven very compelling and the stock prices of TZOO and OPEN have subsequently shot up, with BofA-ML recently upgrading OPEN based primarily on their daily deal revenue that will be coming in.

While I think OpenTable has a great business and I use the site frequently, their valuation and reach makes them less compelling to me than Travelzoo, which already has a daily e-mail that reaches +21 million people around the world on a daily basis to hoc travel deals. The TZOO daily deal is different though...instead of a flight or a hotel that is available for several weeks or months for a discount rate, the daily deal is a one day, huge savings coupon for a specific restaurant, spa, activity, etc. deal. They currently offer the daily deal in 6 cities (SF, LA, Houston, Chicago, Minneapolis, and Des Moines(!?)) and have done well with the deals they have offered so far, selling several hundred in each city.

Here is why I think it's a game changer for them and why you, as an investor can take advantage of information that is new enough that I don't think most of Wall St. fully understands just how big this could be. Below are the stats for recent deals on TZOO. As you can see, there are several deals in a couple of the cities and one deal in a few of the newer markets. For conservatism sake, I have assumed that TZOO has not gotten as good of a revenue share deal as Groupon and only gave them 30% credit for the face value of the deals, but as you can see, the revenue is material to a company that is this small when you consider they will potentially do lots of these deals each quarter going forward...and they haven't even launched in NYC, Miami, Philly, Dallas, etc. If they can make this much in a market like Des Moines, imagine what they could do in larger 2nd tier markets like Cleveland, Tampa or San Antonio for instance.

Example Deals
Des Moines Deals Bought Deal Value Total $ Sold TZOO Revenue
Deal 1 125 $10 $1,250
Deal 2 107 $10 $1,070
Deal 3 65 $14 $910
Deal 4 25 $10 $250
Deal 5 48 $15 $720
Deal 6 717 $20 $14,340
Deal 7 358 $25 $8,950
Deal 8 196 $10 $1,960
DM TOTAL $29,450 $8,835
Chicago
Deal 1 419 $50 $20,950
Deal 2 970 $59 $57,230
CHI TOTAL $78,180 $23,454
Minneapolis
Deal 1 500 $40 $20,000
Deal 2 1,326 $10 $13,260
Deal 3 1,217 $39 $47,463
Deal 4 1,055 $10 $10,550
MINNY TOTAL $91,273 $27,382
Houston 112 $59 $6,608
LA 472 $89 $42,008
SF 99 $25 $2,475
OTHER TOTAL $51,091 $15,327
TOTAL $74,998

Assuming TZOO does not roll out to any additional cities for the remainder of this quarter and giving them credit for this amount of revenue for ONLY 20 DAYS a quarter (this is a rough approximation, but fair for conservatism in my mind), TZOO could earn an additional ~$1.5MM in revenue per quarter (~5.5% growth over what they earned in Q2), but the best part is the margin on this revenue should be extremely high going forward as it takes so little manpower compared to the rest of their business to get these deals negotiated.

As an added bonus, given that TZOO already has a sales team that is focused on getting local travel, entertainment and hotel deals for their main service, ramping up this service in other cities should be relatively easy...heck, Groupon is launching in about 1 new city a week at this point.

Going forward, TZOO will roll out to more cities domestically with more deals. International is an enormous opportunity as well, with many Western European cities just recently getting on the daily deal bandwagon. If only a few deals and a few cities can grow revenue this significantly, imagine what could happen in coming quarters when they have 10-20 cities and more deals running simultaneously. That 40x P/E multiple they currently sport could drop to a meager 15-20x when the E grows.

Disclosure: No positions, but considering a long in TZOO pending further diligence

Source: Travelzoo: Still More Upside From Daily Deals