Seeking Alpha
Value, research analyst, author, long only
Profile| Send Message|
( followers)  

As investors we all have a different preference and goal in purchasing stocks. Some look for a solid dividend and consistency while others would rather purchase a small company where the rewards may be greater but the fall could be harder. We all rely on different indicators to tell us the direction of a company, both long and short. Many investors only play the technicals, some only the fundamentals and others incorporate both. Yet there is one area of research and trading that is more vital than the others. It tells the investor both the current and future strength of a company.

Earnings tell the ultimate story in which direction a company is going and where the company has been. Our unemployment rates stay the same, there is turmoil in the Middle East, the politicians can’t agree on the new credit card and our market is always one bad report away from a 100 point loss on the Dow Jones Industrial Average. With that being said earnings keep going up. Does it mean that our economy is in better shape than we believe? Or does it mean that online consumerism’s popularity is growing much faster than we realize. We are living in an economy where online social media can reach more people in a day than a corner store can reach in a year. A business is more effective being used on the Internet versus physical locations since expenses and maintenance are lower and profit margins are higher. The corporations who have realized these principles have thrived and those who have not are being left behind. Look at Google’s (NASDAQ:GOOG) most recent earnings report. Overall revenue rose 32% in Q2 which is typically the weakest quarter. Companies such as Google, Amazon (NASDAQ:AMZN), Priceline (NASDAQ:PCLN), Baidu.com (NASDAQ:BIDU), Netflix (NASDAQ:NFLX) and eBay (NASDAQ:EBAY) are all major corporations which lead the pack as companies that create revenue over the Internet. There have been many companies to take advantage and grow during this era of technology while others have failed to evolve. A fast growing company whose revenue is created through online travel purchase is Travelzoo.

Travelzoo Inc (NASDAQ:TZOO) is scheduled to release earnings Thursday July 21st at 11:00 AM. At the very least I expect a solid short play after the earnings report which was witnessed on April 21st. On April 20th the stock closed at $73.87, on April 25th the stock reached a high of $103.80.

The first quarter was highlighted with revenue of $37.0M, up 30% year over year. Non-GAAP earnings per share of $.37 compared to $.15 the prior year.

North America saw revenue grow by 23% to $27.6 million. Europe’s business segment revenue grew 53% year-over-year to $9.4 million. As of March 31st 2011 there were 19.9 million Travelzoo subscribers worldwide.

Travelzoo has given several indications throughout the current quarter of accelerated growth. On May 5th the company announced they had surpassed 23 million subscribers. A significant achievement considering the company had 19.9 million subscribers as of March 31st. I believe this to be the result of their expansion into new markets and an increase in production within their European market.

On May 16th Travelzoo announced European subscribers bought $3.4 million in Local Deals during the first 45 days of the quarter, a 196% increase in sales compared to the first 45 days of Q1. Travelzoo was able to accomplish this by generating average gross revenue of $43,600 per deal as compared to $34,000 in Q1.

June 8th the company announced results from two additional markets, Asia and Australia. On May 30th the company initiated a trial in Japan in which the company generated 630,000 in two days. Since April the Australian market had generated close to $1 million in gross revenue during a two month time period.

I do not believe that Travelzoo has come close to matching their potential. During Q2 Travelzoo has expanded into 2 additional continents, Australia and Asia, in addition to North America and Europe. The number of subscribers are unknown within these new markets. Based on the success you have to conclude that the majority of the additional 3 million subscribers are located in these markets.

The business of online travel and entertainment is expanding and there are many other corporations similar to Travelzoo who specialize in North America. Orbitz (NYSE:OWW), Expedia (NASDAQ:EXPE) and Priceline.com all offer similar packages with their own unique twist. North America has a population estimated at 530 million and Travelzoo had 14.8 million subscribers as of March 31st which represents 2.79% of our population. Europe’s population is significantly greater with an estimated 733 million citizens. As of March 31st there were 5.1 million subscribers in European market, or .69%.

Travelzoo has the right concept in place. The North American market may be too small to support the many companies who offer services similar to Travelzoo. Why take the chance? Europe, Asia and Australia all have large markets and based on the figures are selling more units faster.

I believe Travelzoo is in the process of changing their identity as a company. I am certain they will always offer great packages in America but the data that has been given suggest more room for growth in other countries. I would not be surprised to see earnings come out on Thursday and the company to announce less revenue in North America by 5%, Europe’s revenue to increase substantially and over $2 million in revenue from there emerging markets. I expect a blow out quarter for revenue but I also expect higher costs for the company.

Every indication points to a jump in price back over $100. The stock is trading in the same range as just before Q1 earnings report. The only difference is I expect this quarter to be even bigger, I expect revenue to blow away all expectations. Travelzoo is setting themselves up to be a special company. Travelzoo could become the leader in worldwide deals, the number one platform where travelers can find the best rates anywhere in the world. As a result, I expect Travelzoo to reach annual sales over $1 billion in the next five years. The stock is a good short term play, before earnings, at any price under $80 but is a strong long term play at any price under $100.

Source: Travelzoo: What to Expect Approaching Earnings and Beyond