Trivago's Rise: Let The Numbers Speak

Summary

• Since its IPO last December, Trivago’s market cap has risen to $8B, whilst raising only €1.4mm prior to IPO.
• Trivago has developed rapidly over the years, now covering 55 markets.
• We are long on Trivago given its substantial growth prospects and market potential.

Since its IPO last December, Trivago’s (NASDAQ:TRVG) stock price has doubled, and shows no sign of slowing down. We are bullish on the stock given its financials outlook, steady growth, a unique market niche (with growing market share) in the hotel search engine industry.

Overview

Trivago was founded in Germany 12 years ago, and grew from a European local hotel search engine to a multinational technology company with billions of market cap in a few years. Trivago’s CEO Rolf Schromgens has made it clear in the latest earnings report that

“We are only focusing on search. We do not want to be a shop, we do not want to sell room nights, we are not a community or a video portal. And the third was to conquer a position at the top of the funnel, to really built a brand that everybody knows and get people to ask for it.”

And the results of focusing on its specific market have paid off - the international growth on user traction and activities on the website have grew significantly as shown in the below sections, far outpacing the growth rate of its competitors including Priceline (PCLN) and its parent company Expedia Inc (EXPE).

International traction

Trivago initially started operation in EU countries, and has now expanded into 55 nations across the world. While as of today continental Europe is still its biggest market, Trivago has gained tremendous momentum in the Americas, which hosts its biggest network of OTAs and chains.

Solid financial performance & Substantial growth

Financial performance and active users have skyrocketed for Trivago in recent years, and 1Q 2017 marks the first quarter that the company turned in a positive net income.

_{Source: Trivago IR}

• Total revenue increased to €169.2 million in the fourth quarter of 2016, or 70% year over year, compared to €99.3 million in 2015, and to €754.2 million in the full year 2016, or 53% year over year compared to €493.1 million in 2015. Net income increased to €0.1 million in 4Q 2016, turning positive from -€2.0 million in 2015.
• Adjusted EBITDA was €11.9 million in 4Q 2016, compared to €12.3 million in the fourth quarter of 2015. Adjusted EBITDA was €28.2 million for the full year 2016, up from -€1.1 million in 2015
• Growth in Qualified Referrals was 65% year over year in 4Q 2016.

Going forward, we expect Trivago to continue delivering strong financial performance, due to the massive traction it has gotten across many markets, and the number of new contracts it has obtained in the recent years. The management also raised the company's full-year guidance in the last meeting call, stating that,

''Given our strong start to the year, we have increased our full-year guidance and now expect annual revenue growth to be around 50% in 2017, with our adjusted EBITDA margin likely to be up slightly from 2016''. (Axel Hefer, CFO)

Possibility of further share acquisition

Expedia owns majority of the stake – 64.7% voting rights of Trivago – and was promised the ''opportunity to buy more'' of the remaining outstanding shares as part of the deal. In fact, Expedia has already increased its ownership of Trivago for over 3% since their first acquisition in 2012, after the company delivered 4 consecutive years of doubling revenue. For 2012, Trivago projected a net revenue of 100 million euros, mainly attributing to its CPC revenue model.

As a comparison, its counterparty in the flight booking industry, Kayak, was acquired by Priceline at $40 a share, around 54% upside from its IPO price of $26. This comes just a month prior to the Expedia-Trivago deal, and valued Kayak at around $1.8 billion at the time.

We see a similar pattern and market position in this case with Trivago, and it is very possible that Expedia will increase its stakes in the future, because of the synergy between both companies can create value not only for Expedia (to have Trivago as a source of more incoming visits), but also for Trivago (to utilize more of Expedia's resource in the hotel room offerings).

Company’s focus ahead

The focus of Trivago seems to be on improving its data quality on the hotel search results, and ultimately enhancing customer experience on the website. Customers have reported issues when booking with the site such as finding out there are no longer available rooms when redirected from Trivago to individual hotel booking sites (such as Booking.com, Hotels.com, etc.), or the room rates shown on Trivago differ significantly from the rates that were actually offered on the sites upon booking. The company’s ability to generate consistent revenue in the future depends on whether it can clear the input data, optimize algorithms, and assure quality control for its metasearch services.

Risk considerations

Half a year from its going public, the stock performance has been solid with few downward corrections, and consecutive quarters of positive earnings surprise have supported a consistent uptrend. TRVG is not trading so much for its fundamentals but for its fast growth and the momentum since its IPO. A earnings miss for a future quarter might stop the hype and raise doubts for the investors.

Another risk for Trivago is that it is relying solely on the cost-per-click revenue model. While focusing on only one type of service has proved effective for the firm, we would like to see it further diversifying its revenue sources in the future.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.