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1 More Company Bails on Groupon's Model

Shares of Travelzoo (Nasdaq: TZOO  ) plunged nearly 15% on Friday.

The travel deals publisher stumbled after posting preliminary financial results for the quarter that ended last month. Travelzoo now sees revenue of $35 million to $35.5 million in the recently concluded third quarter. Profitability will clock in between $0.20 a share and $0.22 a share.

That's not good. Wall Street was expecting a profit of $0.27 a share on $38.9 million in revenue. Making matters worse, Travelzoo is going the wrong way. It cranked out net income of $0.36 a share on $38.7 million in revenue during the same period a year earlier.

What's not working? What's going to change? Travelzoo is dropping a not-so-subtle hint.

"We have found our hotel search offering and the group-buying voucher model not meeting the needs of hotels and users well enough, and therefore plan to adjust our product offering," CEO Chris Loughlin said in Friday's press release.

The company goes on to detail plans to either acquire a hotel booking website or develop a lodging reservations platform, hoping that hotel commissions will help pad its deals business. Either way, it may not be long before Travelzoo becomes the latest company to abandon the flash-sale model that was popularized by Groupon (Nasdaq: GRPN  ) .

Just two years ago, everybody wanted to be Groupon. However, after seeing dot-com giant Facebook (Nasdaq: FB  ) and dining reservations leader OpenTable (Nasdaq: OPEN  ) bow out -- not to mention watching Groupon's own stock take a beating -- it's fair to say that getting establishments to offer half-off deals and splitting the proceeds of the prepaid vouchers isn't a slam-dunk business model like we originally thought.

Travelzoo's flagship model works. It had 22.1 million unduplicated subscribers throughout North America and Europe as of the end of June. These are willing recipients of the company's Travelzoo Top 20 weekly email missives. Folks don't seem to mind that these are sponsored deals, largely because the company does a great job of vetting to make sure that only desirable deals go out.

It will certainly be interesting to see how it parlays an enhanced hotel booking engine on top of its model. However, the real challenge now is for Travelzoo to resume its growing ways. Reports surfaced earlier this year that Travelzoo was hiring a financial advisor to explore strategic alternatives that may include a sale of the company.

The company knows better than anyone else that nobody wants to buy a loser, even if it's a great deal. As soon as Travelzoo resumes its growing ways -- with or without discounted voucher sales -- investors will follow suit.

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Longtime Fool contributor Rick Aristotle Munarriz owns shares of Travelzoo. The Motley Fool owns shares of Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook and long OCT 2012 $40.00 puts on OpenTable. Motley Fool newsletter services recommend Facebook, OpenTable, and Travelzoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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