Is Travelzoo a Buy on Valuation?

With industry tailwinds and some signs of turning around, the stock could appeal to price-conscious investors.

Apr 23, 2014 at 8:15AM

Are things getting any better for travel-deals aggregator Travelzoo (NASDAQ:TZOO)? As opposed to its larger, market-darling brethren, such as (NASDAQ:PCLN), Travelzoo's growth is anemic at best, which explains the substantially more attractive valuation. In recent months, the company's European operations have held the line, while North American growth has officially stalled out. Travelzoo has been derailed from its early days of high-flying growth, but that doesn't mean the company is on a cruise to nowhere. For those who seek deals on the public markets, this stock may still have appeal.

Segment laggard
The travel industry has been, currently is, and is expected to remain robust in the coming years. For the technology players involved, the industry tailwinds are strong. Take a look at Priceline's last few years and one can see free cash flow -- somewhat a rarity in the tech world -- skyrocketing year after year: nearly 70% from year-end 2011 through 2013. The $64 billion business is growing at a rate that is typically reserved for businesses a fraction of its size, such as Travelzoo, with a market cap of less than $300 million. But even though the latter at one time was experiencing similar growth, that simply isn't the story today.

In Travelzoo's most recent quarter, the company generated net income of just $4.5 million on revenue of $40.2 million. Both numbers were lower year over year, and it was the company's core North American business that brought things down. The segment dropped sales 12%, while Europe ultimately kept things in positive territory with a 13% gain.

What's working
There are some bright spots to the company's operations. Management is rightfully convinced that its mobile strategy needs to move forward at full speed -- 40% of site traffic is sourced through mobile outlets -- and Travelzoo is seeing some adoption as its number of app downloads in the past quarter was the highest its ever been, at roughly 3 million.

Travelzoo also recently launched its own booking platform for hotels, so that users can book directly on its site as opposed to being patched through to other sites. The company expects meaningful earnings to appear in the second half of this year, as revenue is recognized upon the hotel stay, not the booking.

On a fundamentals level, it is worth noting that the company is still generating positive cash flow amid its revenue declines and investments in mobile strategy. With some forward momentum, Travelzoo has the ability to print cash, but that just hasn't happened yet. Perhaps the strongest argument in favor of the stock is its valuation. Travelzoo trades at a forward P/E in the mid-teens and holds an EV/EBITDA of 7.5 times. Infinitely better-performing Priceline trades at 20 times earnings with an EV/EBITDA of nearly 23 times. If Travelzoo's move to mobile is ultimately successful and begins to drive revenue, earnings should follow suit, as the company has focused on efficiency and profitability in recent periods.

The view from 30,000 feet suggests that Travelzoo can swing the other way and bounce off its lows with industry tailwinds and a smart general strategy, but a closer look casts more doubt, as the company has yet to prove that it can achieve value in the eyes of its users. Price-conscious investors, especially those compelled by the industry and business model, should keep a close eye on this one for signs of improvement.

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Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Priceline Group. 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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