It's been a painful year for Trivago N.V. (TRVG 3.85%). Shares of the hotel-booking specialist are down 36% so far in 2018, and 81% over the last year, as revenue growth has suddenly turned negative.
A year ago, Trivago's revenue was growing by 67%, but in its recent second-quarter earnings report, revenue actually fell 21%. Management made a familiar argument on the earnings call, saying that commercialization rates have declined, referring to what bidding partners like Booking Holdings (BKNG 4.72%) and Expedia (EXPE 5.67%) (as well as independent hotel operators) pay to get clicks on the site. As the company has explained before, its largest partners have scaled back spending to focus on profitability rather than market share. Revenue per qualified referral (RPQR), one metric that tracks commercialization, has fallen 13% in the second quarter and 11% in the first half.
After opening down 7%, the stock was trading higher by the afternoon as the market seemed to applaud the company's shift in focus to profitability from revenue growth. However, profit was down sharply in the second quarter, to a loss of 0.06 euros per share from a profit of 0.01 euros per share, though it improved modestly from the first quarter.
Trivago plans to move toward profitability by scaling back on marketing spending and improving its return on advertising spend (ROAS), which seems like a wise move since marketing costs take up nearly all of its revenue. There was, however, one warning sign during its earnings call.
Why commercialization is a problem
It's bad enough that RPQR is down double digits and seems likely to remain that way for the foreseeable future, as Trivago's bidding partners appear to be experimenting with competing platforms such as Google's hotel-finder search tool. (Or they're simply more concerned with profitability than they have been in the past, as management has posited.) Still, CEO Rolf Schromgens told me he doesn't see evidence that competition has been responsible for the sudden downturn in revenue growth.
Aside from the loss in revenue from declining RPQR and commercialization, the greater concern for investors may be that it reveals Trivago's lack of a competitive advantage. The company sees its strength as its singular focus on hotels, unlike many online travel agencies that also provide booking for extras like flights and rental cars; Trivago offers the ability to screen for a variety of factors like being pet-friendly or having a pool, and has a wide range of properties available on the platform. However, it's become clear that Trivago is just one of many competitors in the hotel-booking marketplace. The company is largely subject to market conditions out of its control, and the whims and behaviors of larger partners like Booking and Expedia.
A competitive advantage is often a key component in an outperforming stock, and the lack of one may explain why Trivago shares have crashed over the last year.
Why it may not be a problem
At this point, Trivago shares have fallen so sharply that it may only take a minor catalyst to send the stock higher, which seems to be one reason the stock was moving higher today. The company raised its full-year adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) range from a loss of 25 to 50 million euros to one of between 15 and 30 million euros, signaling positive adjusted EBITDA in the second half of the year.
On a price-to-sales (P/S) basis, for example, Trivago is significantly cheaper than its peers:
Given that discrepancy, Trivago shares could spike if the company can execute on its promise to deliver profitability. Considering that commercialization also appears to be cyclical, revenue growth could return along with profitability if bidding activity picks up among its peers.
However, since the company sees revenue continuing to decline for the second half of the year, the stock is likely to be quiet over the coming months. But given how much it's fallen in the last year, there's a clear opportunity for a rebound if its numbers improve.