Trivago (NASDAQ:TRVG) has been one of the biggest disappointments on the market in recent years. After its 2016 IPO, the stock surged out of the gate thanks to aggressive bidding tactics from ad partners like Expedia (NASDAQ:EXPE) and Booking Holdings (NASDAQ:BKNG).
However, the stock crashed as they pulled back from spending and Trivago lapped a benefit from a penalty imposed on Booking for violating the terms of its platform. Shares are now down more than 75% from their all-time high in the summer of 2017.
Since then, Trivago has reoriented its strategy and cut back and optimized its advertising in order to focus on bottom-line profits. While that strategy has resulted in revenue falling, the fourth quarter was the clearest sign yet that that strategy was delivering the desired results.
The big numbers
Revenue fell 8% in the quarter to 166.8 million euros, but that was largely owed to the company's decision to pull back on advertising as selling and marketing expenses declined 30% to 116.7 million euros. As a result, Trivago's return on advertising spending surged from 118% in the quarter a year ago to 163%, which led to adjusted EBITDA reversing from a loss of 8.7 million euros to a profit of 28.6 million euros. On a per-share basis, it reported a profit of 0.03 euros, up from a loss of 0.03 euros.
Shares whipsawed after the earnings report came out Wednesday morning, opening up 10% but then trading down 5% later in the morning, a sign that investors don't know what to make of the report.
Trivago investors may be getting frustrated as revenue continues to fall and the stock languishes, but the company is taking a number of steps in the right direction. Here's what management focused on during the earnings call.
Expanding the platform
Two years ago, Trivago started to expand its hotel-booking platform to include alternative properties like vacation rentals and apartments, partnering with sites like Expedia subsidiaries HomeAway and VRBO. The company ended the fourth quarter with more than 1.5 million "alternative accommodations" listings, up from just 250,000 units a year ago. That growth has made Trivago's platform more appealing to users, providing multiple options in one single search, and helped insulate the company from the rise of competition like Airbnb. Growth in that category should continue, as CFO Axel Hefer said the long-term goal is for every listing in the world to be available on Trivago's platform. However, the company needs to gradually improve its algorithms so it can better incorporate apartments and vacation rentals into its search in a meaningful and helpful way.
Europe remains strong
Trivago is based in Germany, and Europe remains its strongest market. American viewers may remember an ad blitz on TV screens from a year or two ago, but revenue in the Americas has fallen as the company has scaled back its advertising spending. In the Americas, revenue declined 18% in the quarter but was down just 4% in Europe, showing that the more mature market is not as sensitive to advertising cutbacks as newer markets like the Americas and the rest of the world.
In other words, that strength in Europe, where return on advertising spending jumped from 136% to 202%, should help profitability even if the company faces growth challenges in other parts of the world. CEO Rolf Schroemgens said he was encouraged by the performance in Trivago's home market.
Revenue growth will return
In its full-year guidance, Trivago forecast it would return to revenue growth in the second half of 2019 after continued declines in the first half. The company also guided to adjusted EBITDA of 50 million euros to 75 million euros for the year, up from 15.6 million euros in 2018.
Hefer noted that the market Trivago competes in, online travel agencies, is seeing fundamental growth and that Trivago should naturally return to revenue growth as it stabilizes and laps the headwind from the recalibration of its advertising spending last year. Hefer also said the company is in a position in which it should be gaining market share in the industry due to its unique comparison platform.
While the company believes it is regaining its footing, the online travel market remains brutally competitive, as Booking and Expedia dominate the market, and their spending on bids on Trivago has an outsize influence on its performance. If Trivago can return to solid revenue growth and deliver gains on the bottom line, this could be an appealing entry point for the stock. However, after being burned before, investors are likely to remain skeptical until Trivago makes good on its promise.