Where Is the Best Value in the Online Travel/Deal Space?

It wasn't too long ago that shares of Travelzoo (NASDAQ: TZOO  ) surpassed $100 a share. After less than three years its shares now trade at just $22, and in October they have traded lower by nearly 20% following a disappointing quarter. With that said, fundamentals are significantly better than in 2010. Does this mean that Travelzoo is the best value in the online deal/travel industry?

A post-earnings value opportunity?
Back in Travelzoo's heyday, margin growth was explosive and the company saw sales rise 30% annually. As a result, investors once thought that such growth was sustainable. Now, revenue growth has declined to a rate of about 5% annually and the company's total subscriber gains have slowed to a rate below revenue growth . Hence, the market no longer values Travelzoo as a high growth company with the potential to become massive, but rather a fair value company that is simply struggling to remain relevant.

With that said, overall growth of only 5% is not a reflection of what we've seen with online travel and deal companies. Moreover, Travelzoo is a company that began to expand rapidly in both Europe and Asia Pacific regions in the last two years, yet already revenue growth has stalled at just 7% year over year. For a company that is supposedly expanding, its growth should be more aggressive.

What about competitors?
At just 2.1 times sales and 16 times next year's earnings some might consider Travelzoo a value opportunity. Yet in the fast-growing online travel/deal space, value can only exist when growth is present. Hence, opportunity might be found elsewhere. Perhaps the most obvious name is Priceline (NASDAQ: PCLN  ) .

Priceline is one of two companies in the NASDAQ that has crossed the $1,000 mark, which is quite impressive considering that it traded below $20 in 2003. Priceline is the largest U.S. online travel company. It has produced sales of $5.53 billion over the last 12 months and it is growing rapidly in emerging markets .

Priceline is impressive because it has maintained 25 % plus year-over-year growth in a space that is growing at 10% annually in the U.S. alone. Therefore, Priceline has stolen market share from the likes of Travelzoo, and more importantly, Expedia (NASDAQ: EXPE  ) .

Expedia has seen its stock decline 20% in 2013, much of which came after the company admittedly lost traffic share to competitors. Expedia grew total sales by 16% year over year in its last quarter, mainly driven by strong growth from emerging markets and from sites Trivago and eLong.

With that said, 16% growth is not a negative. While Priceline is valued about nine times greater than Expedia, the two companies are actually close in size. In particular, Expedia has trailing revenue of $4.4 billion , which means that Priceline is roughly 30% larger than Expedia.

Why the premium?
One of the reasons that Priceline has commanded such a large market premium to Expedia is because its profit is second to none. Priceline has an operating margin of nearly 35 %; Travelzoo's is 15.3% and Expedia's operating margin is an even worse 10.6 %.

Priceline has somehow found a way to capitalize on nearly all of its investments; it has a return on equity of 35% versus 5% for Expedia. However, the questions with a company such as Priceline, which operates at a level much greater than its peers, are whether or not such returns and margins are sustainable, and if upside exists.

Looking at a near identical company in Expedia, it seems logical that Expedia would have more room to grow margin and return on equity. Thus if Expedia can ever improve the quality of its investments and improve its margins, it actually has more room to run higher because it is a significantly cheaper stock with decent growth.

Travelzoo: The value stock?
In my opinion, it is tough to identify Travelzoo as a value stock or Priceline as a good buy over $1,000 a share. Instead, Expedia looks to have the greatest amount of upside from this point forward.

Expedia trades at just 1.5 times sales which is significantly cheaper than Travelzoo's 2.1 times sales. Plus, Expedia has much greater growth. Granted, Expedia's growth is not at the same level as Priceline, but to invest in Expedia you are not going to pay 10 times sales either.

Moreover, despite Expedia's lousy margins it still trades at just 14 times next year's earnings while Priceline trades at 22 times forward earnings. Sure, Expedia does not have momentum in its favor or the cult following that pushed shares of Priceline over $1,000, but if a company does well its stock usually follows.

In the case of Expedia, 16% growth is not bad and 14 times next year's earnings is pretty cheap. Thus, it might be a better value than Travelzoo and present more upside than Priceline.


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  • Report this Comment On October 27, 2013, at 1:31 AM, Putmeincoach wrote:

    I disagree. Travelzoo at the moment is a fair value play. Expedia is well priced. Priceline is a bubble regardless of your correct statements. But none of the three have good enough margin of safety to warrant an investment. All over valued.

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