Is the Party Over for Travelzoo Inc?

Travelzoo (NASDAQ: TZOO  ) was one of the best performing stocks of 2010 and, after losing half its value in 2011, the stock has been volatile, as investors desperately seek the next Priceline (NASDAQ: PCLN  ) or Expedia (NASDAQ: EXPE  ) . Yet, following its first-quarter report, we now know the chances of Travelzoo growing to become the next massive online travel company is slim to none. But does that mean it's a bad investment?

Evidence of clear deceleration
Travelzoo grew rapidly in the years before 2012, but during the last two years, single-digit revenue growth has become the norm. Furthermore, in recent quarters, Travelzoo's year-over-year growth has rapidly diminished, and in the first quarter of this year, the reality of what Travelzoo has become is apparent.

Quarter -- Year

Year-Over-Year Revenue Growth (Decline)

Q1-2014

(4.7%)

Q4--2013

1.4%

Q3--2013

5%

Q2—2013

5%

Q1—2013

7%

Source: 10Qs

As you can see, Travelzoo's revenue growth in this most-recent quarter fell for the first time ever. Not only did it show a deceleration from prior quarters, but it was a rather large year-over-year loss. In addition, this decline challenges the company's business model, or their idea that subscriber growth translates to revenue, as both its subscribers in Europe and North America showed slight growth.

To put all this in perspective, Travelzoo has struggled to produce any level of meaningful growth for the better part of a year in an industry with double-digit growth. Priceline and Expedia are both many times larger; both have double-digit growth, and are expected to see 24% and 16% increases, respectively, to revenue in 2014.

What Travelzoo doesn't have
Travelzoo has a niche market of selling vacation packages to consumers; therefore, many thought it had a bright future, especially when it traded above $100 in 2011. Now, however, Travelzoo looks like a company that will struggle to create any level of growth. Thankfully for shareholders, the company does have a loyal following of consumers who utilize its rather cheap vacation packages. In all likelihood, this should keep Travelzoo in business, and able to find a point of sustainability.

For investors still betting on growth, that ship has likely sailed. As previously said, Priceline is expected to grow 24% this year, but this growth is not created by Priceline.com. Instead, Priceline's Booking.com is driving growth, which allowed 85% of the company's total gross bookings to come from international markets last year.

In comparison, Expedia has Trivago, which was recently acquired, as the world's largest hotel search site. In Expedia's last quarter, Trivago saw 85% growth, and helped Expedia produce its 18% growth rate. Travelzoo has no such service, or something to work in synergy with its site. And while its European business grew 13% in the first quarter, its $13.8 million in revenue is rather insignificant, or not comparable to Booking.com or Trivago.

Lastly, Travelzoo's mobile business is underdeveloped, maybe not for Travelzoo's main site, but for its other sites. Fly.com and SuperSearch do not have mobile apps, and both have seen search declines during the last year. In fact, all of Travelzoo's search business has declined as it allocates resources to create a better booking site, which consequently means more direct competition against Expedia and Priceline.

With regards to Priceline, its Booking.com business saw mobile accommodation bookings grow 160% last year, to $8 billion, further showing mobile as an important business, and one where Travelzoo did not capitalize to the best of its ability.

Final thoughts
In all likelihood, Travelzoo is not going to experience many growth quarters ahead. This is a company that chose to focus on packaged deals. Now, with the company showing a sense of urgency to capitalize on bookings, it might be too late to compete against the juggernauts of Expedia and Priceline.

However, this doesn't mean there's no value in Travelzoo. This is a company with operating margins of 15%, meaning it should earn more than $20 million in operating income this year, combined with $61 million in cash. Therefore, at 13 times forward earnings, the stock is not expensive; it's just different relative to its peers.

Travelzoo could become a nice investment, perhaps making smaller acquisitions, buying back stock, or maybe even paying a dividend. In theory, once a company no longer has growth to offer shareholders, it gives back by returning capital. For Travelzoo, this might be the best bet, as it's really hard to imagine a scenario where it takes any piece of market share from either Expedia or Priceline.

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  • Report this Comment On April 21, 2014, at 5:36 PM, teamonfuego wrote:

    The value of TZOO also comes from its traffic. The company trades at huge discounts to its peers when looking at the valuation relative to the traffic it generates. They are still a top 10 travel destination site in the US and their 27 million + subscribers are worth a lot to someone looking to pick up traffic / email lists on the cheap.

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