David's 6 Biggest Stock Pick Losers, No. 4: Trivago

It's tough to pick a set of stocks that will beat the market. David Gardner's Rule Breakers and Stock Advisor portfolios, however, have done so consistently.

But nobody's perfect, and as he has often said, every portfolio is going to have losers. Here at the Fool, we're serious about the need to acknowledge them and learn from them. So, in this week's Rule Breaker Investing podcast, David will break down his biggest losers of 2015, 2016, and 2017 -- with some help from a few Foolish guests to take some of the sting out of it.

In this segment, he's joined by analyst Rick Munarriz to talk about Trivago (TRVG), which has lost about two-thirds of its value in the short period since he added it to his portfolio in June 2017. They discuss why the hotel and room search metaportal company has been so thoroughly clobbered after an ambitious post-IPO run-up and why it might be a bounce-back candidate from here.

A full transcript follows the video.

This video was recorded on Jan. 10, 2018.

David Gardner: David's Biggest Losers No. 4: All right. Here we go with my fourth worst stock pick of the last three years. And those first three -- one reflection I have about them is that they were all picked in 2015, so they've had a few years to really, really be bad. This next pick, though, I'm sorry to say I picked less than a year ago and here we are featuring it on David's Biggest Losers, Vol. III.

Yes, the date was June 28 of last year. The company -- the ticker symbol is [TRVG]. If you're a Rule Breakers member [and darn it, why wouldn't you be at this point, although this is not the best advertisement for Rule Breakers ]. If you're a Rule Breakers member you might recognize [TRVG] as Trivago. The stock today has gone from $20.95 to $7.31 as we tape. So, yup, that's down 65%. That hurts a lot in less than a year. Just seven months. To help me think through and do a little analysis of Trivago, I'd like next to welcome Rick Munarriz. Rick, welcome!

Rick Munarriz: Thank you, David!

Gardner: Thank you very much, Rick. How many years have you been at The Fool?

Munarriz: It's been 22 years, now. This will be 23 once we get to October of 2018. But 22 and change.

Gardner: That is pretty awesome, especially considering we only started the company about 25 years ago, so thank you so much, Rick. What are a few of the things you do, here, at the Fool?

Munarriz: I do a little bit of everything. Obviously, I'm part of the Motley Fool Rule Breakers team that helps you find some of these loser stocks that wind up on your mixtape unfortunately.

Gardner: My mixtape.

Munarriz: I'm also in Motley Fool Supernova. I am the Phoenix 2 lead analyst. We have a real-money portfolio geared toward the retirement-minded approach. And I still write a lot of stuff on the editorial side. I have maybe 10,000-15,000 articles that I've written over more than two decades, and I'm still kicking in with articles there.

Gardner: I'm not sure there's a more prolific writer or a better writer than we have at The Motley Fool and we're not just talking about Rick as a writer. He's a wonderful, gifted stock picker. Rick, thank you for helping me think about Trivago right now. First off, for those who don't know what the company does, what does Trivago do?

Munarriz: Trivago is like a metasearch for hotels and other properties; basically, anything from bed and breakfasts to actual properties to hotels. There's 1.8 million properties all over the world that have listing pages. It's basically like a portal and a search engine where you punch in a location or name a place, and it will show up there along with advertisements of places for you to book that property. They're based out of Germany, but they're all over the world. They're in 33 different languages. It's 55 different localized website versions of it. It's pretty much a globetrotter in every sense of the word.

Gardner: That's right. And their tag line is "Find Your Ideal Hotel for the Best Price." If anybody wants to tap into Trivago.com as they're listening to Rick talk about it, you'll notice their opening screen is very similar to Google. It's pretty much just a blinking cursor asking you what you want to search. What's thing that went wrong No. 1 for Trivago, Rick?

Munarriz: Well, if you're going with a football theme for this podcast, I'm going to go with a football theme. I'm going to say -- and I'll make it just as topical as possible -- I guess they suffered the Georgia Bulldogs [...]. That they had a great first half, as Georgia did during the championship football game against Alabama, only to fall apart in the second half and ultimately lose.

With Trivago, you had a company that went public at 11 -- just 11 -- in late 2016. Obviously, we recommended it in Rule Breakers several months later after it had this monster start to 2017.

Gardner: Yes, the stock had pretty much doubled when I decided to pick it then. I mean, for a lot of people, Trivago isn't nearly as big a loser as it is for us.

Munarriz: Absolutely. Some people if they found it earlier probably aren't suffering too badly, and the stock is trading a little bit higher than when it bottomed out a few weeks ago. And it's all relative, but we've got to go by our starting line, and it's obviously been pretty bad for you and for us.

So, it had this great half. Revenue was up 58% and then 67%. And then we got to the second half, and we had 17% growth. And now its guidance for the fourth quarter, which we obviously haven't heard yet, is for between 2% and 15% growth, and then when we get into overtime, which is when the Georgia Bulldogs ultimately lost to Alabama, they're expecting possibly no growth at all through the first half of 2018 and to resume growth in the second half of the year. It's pretty much as bad as you can draw a chart for revenue growth and the stock chart. Clearly that's one thing that went wrong.

And the other thing that went wrong --they're probably both related because this is why it went wrong -- is because the model was exposed with Trivago. And I don't mean this in an awful way because obviously there's a reason why it's still on our scorecard. Trivago is basically based on a bid base. It's not like a referral thing. Like an Expedia or a TripAdvisor or any other kind of portal like Kayak, where they're getting money generated based on what you book from somebody else.

This is a lot like Google, like you said. Once you click on the ad, it will go to whoever paid for that ad, and in the case of Trivago, more than half of its revenue is coming from Expedia, which is its former parent company, and Priceline. So, the world's two largest travel portals are accounting for more than half of the revenue of Trivago. And sometime during the third quarter, both companies got smart, and they started lowering the bids that they're willing to pay. And while they took small hits in traffic, obviously they were happy enough so that they were willing to pay less.

Unlike many of the other more successful search engines or portals, Trivago suffered from these two companies bidding less and actually getting stuff, but they were generating less revenue per referral lead, and that pretty much undid the stock where growth just fell apart. This horrific (unclear: 25:40) that we have right now.

Gardner: All right, Rick, thank you! Now as you said, we've not even held this stock for eight months at this point. We're not giving up or throwing in the towel. Each of the companies that we're covering this week [ David's Biggest Losers, Vol. III ] each remains an active recommendation going forward. That means we would buy the shares today. We recommend people consider buying the shares today even as far down as these companies are. I'll say a little bit more about that later, but Rick, what is something to continue watching for or hoping for people who own [TRVG] or who might be looking at the stock?

Munarriz: Some silver lining to look at. Obviously, the stock is trading. It's a busted IPO. It's trading at less than the $11 IPO price it went at in late December, 13 months ago. One-fifth of its revenue right now [Europe is its largest market and followed closely by the Americas], but the rest of the world accounts for about just a little less than one-fifth of its total revenue and total business; yet it accounted for more than half of its growth in the third quarter. The referral revenue grew 52% [in the rest of the world] compared to 6% in Europe and 12% in the Americas. So, it was growing all over, but basically there's this one section that's growing a lot faster outside of the developed Europe and the Americas market that's working out.

And beyond that, even though Priceline and Expedia are paying less to reach people, the traffic is still strong. There was still 20% growth in referrals in the last quarter. The revenue does not reflect the fact that it's still very popular with people booking hotels. So, you get to the case where by the end of next year, this isn't a hard reset, where it's just going to keep declining and declining. One would hope that once we get through these next three quarters, the comparisons will start getting a lot easier, as we've seen with companies that get this one-time hit on things, as we're seeing now with Trivago.

Maybe not on New Year's Eve, but I think before the latter half of 2018 the stock will hopefully be higher. Maybe not where we bought in [where we recommended back in the $20s], but I think it's a good bounceback candidate as we work through 2018.

Gardner: All right. Rick Munarriz, thank you very much for that thinking. Not just looking backward, but going forward about Trivago. Thanks, Rick! Fool on!