- The business was growing until 2013, where revenue reached ~$170 million. Since then, revenue has been in continual decline.
- Both the advertising and local deals businesses have no competitive moats.
- Management spent ~$16 million over the last two years on buybacks to possibly keep the share price at mid-teens despite no apparent undervaluation.
- The stock is likely fairly valued at its current ~$6 price per share and ~0.58x P/S. There may be a near-term rebound, though we struggle to see any long-term upside.
We struggle to find any particular reason to be bullish on Travelzoo (NASDAQ:TZOO) stock. Aside from the near-term rebound opportunity due to being down ~50% post the COVID-19 selloff, the stock offers little to no upside in the long term. The business is in a secular decline as key metrics continue to weaken. It is, however, still just one of the many challenges at present. From a high-level view, the business lacks strategic direction and competitiveness. Moreover, COVID-19 will put more pressure on the travel industry and the business due to the drastic drop in demand.
What Travelzoo does is aggregate travel and local deals from airlines, hotels, and other travel operators, and then distribute them to its users by mobile app and newsletter. It earns commission revenue through voucher sales and performance advertising revenues from travel companies listing their offers on Travelzoo. Given the nature of the business, technically all of the travel giants such as Expedia (EXPE) or Booking Holdings (BKNG) can easily drive Travelzoo out of business. As a result, of all the many risk factors we see in the stock, the lack of a competitive moat is the most severe risk.
(TZOO. source: stockrow)
It has been difficult for Travelzoo to grow both its business and market share. Having reached $170.6 million of annual revenue in 2013, revenue has since then declined by ~34% to ~$111 million in 2019. In the process, shareholder value has been destroyed. The stock plunged ~60% from ~$29 at its peak in 2013 to approximately ~$11 before the COVID-19 hit in early 2020. It is now trading at merely ~$6 per share. Within the same period, the giants such as Booking Holdings and Expedia have almost doubled and tripled their revenues as they acquire the lion's share of the online travel market.
(Search trends on Travelzoo. Source: Google Trends)
If it has not just yet, the lack of visibility and brand recognition will also definitely hurt Travelzoo in the long run. Based on its 10-K, Travelzoo spent merely ~$10 million on advertising last year, though it is unknown how much is being spent on Google, one of the main traffic drivers for the travel giants. So far, the Google search activities for Travelzoo-related keywords have been in continuing downward trends for years. As a micro-cap and standalone brand, this is the key area where we believe Travelzoo will struggle against the online travel giants. Expedia and Booking collectively control globally renowned travel sites such as Trivago, Booking.com, Priceline, Hotels.com, or Agoda. All these sites generate hundreds of millions of page views that end up driving both conversions and online presence for each other.
The Good Side: Successful JFC Integration Can Potentially Make TZOO a Possible Takeover Target
The online travel industry is a winner-take-all market to some extent, and as such, we found it difficult to see how Travelzoo can turnaround the situation. The $12 million acquisition of Jack Flight Club/JFC, which was a good deal, maybe just be enough to boost growth in the next few years to make Travelzoo an attractive takeover target. As of Q4 2019, this was the only good story around the stock. JFC sells a subscription plan for users to get alerts on cheap travel deals. It has no debt and also has over 50% net profit margin.
There is a cross-sell opportunity by introducing the services to 30 million of Travelzoo members. As the management mentioned in the Q4 earnings call, JFC alone will contribute an additional 5% revenue growth and an additional $0.2 EPS in 2020. Considering a smooth integration of the business into Travelzoo, it is likely that the combined segment can grow bigger than Travelzoo's Local Deals business. The revenue from the Local Deals segment declined by ~10% YoY to $15.2 million in 2019.
With virtually no growth and the pressure from COVID-19, it will take some time for the stock to rebound to ~$11 per share, which is where it was in January 2020. The P/S is now below 1x at 0.58x, while it is now trading at ~$6 per share. In our view, this may be a fair price.
(source: company's 10-K)
In the last two years, the management has spent over ~$16 million on stock buybacks that potentially drove the price up. However, at no point over the last two years did we feel the stock was undervalued whatsoever. As discussed, the business has continually been in decline for some time. At $6 per share, there may be a near-term upside for opportunistic investors to come in today and exit after the rebound happens. Aside from that, however, the overall long-term outlook is lackluster.
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