Travelzoo (TZOO) posted quarterly results with revenue of $37.6 million and earnings of $0.30 per share. These numbers are up from last year’s revenue of $28.1 million and $0.20/share. Based on these results you would expect to see gains; however, Travelzoo experienced a loss of 34.66% after missing the numbers set by analysts who cover the stock.
Regardless of Wall Street’s expectations, I see these earnings as a positive indicator. When a company posts revenue up 34%, from the prior year, nine times out of 10 the stock is going to increase. We set our standards to high as investors bought Travelzoo in a frantic manner over the last month. The stock decreased by almost 50% from its high after the first quarter was released. The decrease in price was not from negative company developments but rather profit-taking by investors and insiders.
Since January 2009, the stock has seen gains of almost 1000%. Companies such as Travelzoo, priceline.com (PCLN), and OpenTable (OPEN) trade at prices much higher than their earnings. Travelzoo’s market cap, after today’s 34% loss, is still over $900 million while its expected yearly revenue is under $200 million. Investors see long term value out of these companies and therefore trade them at a high premium. This hurts the stock on days such as this, when Travelzoo missed high expectations set by Wall Street, causing an overreaction from the market.
I do not see Q2 as a miss but rather a 34% gain in revenue year over year. I was impressed that the company expanded into 27 new local markets during the quarter. This means Travelzoo was expanding into more than two markets per week. Expansion at this rate is expensive as the company must hire, train, and place employees at a constant rate.
Travelzoo has the right plan in place and is spending money to make money. I do not mind missing Wall Street’s estimates as long as I see the company is growing. The expectations were high and the company is still on track to deliver exceptional yearly results. As an investor I am pleased with the expansion into new markets as the company is now creating more revenue per subscriber.
I previously stated that Travelzoo has the potential to become the worldwide leader in travel, as the company continues to expand in other countries. I believe in the likelihood of seeing this develop over the next five years, which would separate it from the competition, hopefully by creating a platform where customers in any country can purchase discounted packages anywhere in the world. This expansion could create revenue to exceed any analyst's expectation. The company has the pieces in place but it will take time, money, and patience to develop. Today’s price action was exaggerated as a 34% decrease in price does not reflect a 34% increase in revenue. Regardless of price action, the report proved one fact, which is Travelzoo’s consistent growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.