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Travelzoo Has 1 Investment Catalyst Remaining

Travelzoo (NASDAQ: TZOO  ) , a company that's arguably too small to compete, has seemingly lost its relevance in the online travel space. Yet, it does have a niche market in deal packages, along with certain other features, that might be appealing to (NASDAQ: PCLN  ) or Groupon (NASDAQ: GRPN  ) .

The rise and fall of Travelzoo
For the first time in Travelzoo's history, it posted a year-over-year revenue loss in the first quarter. Its total revenue declined 5% to $40.2 million, while its operating profit declined 13% to $7 million.

This poor performance was driven by a 12% decline in North American revenue, which makes up more than 65% of its total business. The single bright spot for the company was Europe, which grew revenue by 13% but accounted for less than $14 million of total revenue.

With that said, it seems like just yesterday that Travelzoo was growing at a 30%-plus growth rate and trading at nearly $100 a share, back in 2011. However, after management shakeups, like the resignation of its local deals chief Mark Webb, and continued struggles with PC to mobile monetization, Travelzoo's future looks bleak.

Not to mention, there are other problems that Travelzoo faces such as much larger competitors with far more resources and better operational strategies, like Priceline and Groupon just to name a couple.

Priceline's recent acquisition creates a need
Travelzoo may look like a dead stock by itself, but this alone doesn't mean that it's unattractive to larger peers that may wish to acquire the company. In fact, two specific companies come to mind: Priceline and Groupon.

Priceline is a company with more than $7 billion in annual revenue. Therefore, investors might be wondering what it could possibly want with Travelzoo, a company with 12-month revenue of just $156 million. The answer to this question might conveniently lie in Priceline's most recent acquisition, OpenTable, and its move to offer more than just flights and hotel packages.

Priceline now has a restaurant-reservation platform to make traveling more convenient for its users, giving consumers the ability to make reservations at their travel destination. This is where Travelzoo could come into play, a company that not only sells cruises, flights, and hotels but also packaged deals at restaurants, theater, and other services of this kind.

Hence, Priceline might now find this element of Travelzoo's business attractive as well as its growing European business, where Priceline is strongest and will aim to grow its new reservation technology. With a market capitalization of less than $300 million, Travelzoo would be a relatively small risk for Priceline but an acquired asset with the capabilities to grow with increased scale and exposure to Priceline's enormous platform.

All those users have value
As for Groupon, there are many similarities between it and Travelzoo; both sell discounted travel and deal packages, with the former operating as an e-commerce company of sorts. Groupon has been quickly transitioning from its daily deals email-blast business model with coupon-like offers to now selling its deals on a platform where users can scroll and find deals for longer periods of time.

This strategy has worked well in Groupon's favor, as its e-commerce segment grew 68% in its last quarter, outpacing overall revenue growth of 26% and now accounting for half of Groupon's total business.

Ironically, Travelzoo sells similar packages but still relies largely on an email strategy, or Groupon's old approach. Therefore, Groupon might see upside in Travelzoo's core business, acquiring and implementing an e-commerce like platform.

Also, for Groupon an acquisition might revolve around subscribers, or active customers. Currently, Groupon has 51.8 million active customers, 24% growth year over year. Groupon has figured out how to successfully monetize these users as returning customers, an area where Travelzoo struggles. Therefore, Groupon might find Travelzoo's 20 million-plus subscribers appealing and its growing European presence as well as Groupon looks to tackle other regions of the globe.

Foolish thoughts
Travelzoo alone likely has little to no upside, but with a Priceline or Groupon buyout, its platform and existing business could enhance those business' fundamental advantages. Interestingly, much of the reason that Travelzoo's fundamentals have stalled and fallen can be traced to the rise of others like Priceline and Groupon. However, if working together Travelzoo does have assets of value, and for this reason it might be an attractive acquisition target looking ahead. And if not, don't anticipate a Travelzoo resurgence.

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  • Report this Comment On July 07, 2014, at 4:22 PM, RobertoMurphy wrote:

    Three years ago, Google tried acquiring GRPN for $5 billion. Google still wants a part of the action to compete with Amazon and Priceline. Thus, Google will once again try to acquire GRPN.

    I think $12 to $15 will get the deal done.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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