Shares of Trivago (NASDAQ:TRVG) were gaining ground last month on an analyst upgrade and as investors anticipated the release of the company's first-quarter earnings report on May 1. According to data from S&P Global Market Intelligence, the stock finished April up 11%.
As you can see from the chart below, shares of the hotel meta-search company surged toward the end of the month, propelled by an endorsement from Guggenheim Securities.
Trivago stock gained 7% on April 23 and continued to move higher from there after Guggenheim upgraded its rating on the stock from Neutral to Buy and raised its price tag to $5.50. Guggenheim said the company's focus on profitability as it optimizes its marketing spending gives the stock upside potential.
Analyst Jake Fuller argued that the company could send significantly more cash to the bottom line if it continued to cut back on advertising spending, as nearly all its revenue goes to sales and marketing. Fuller also seemed to think that Trivago hadn't accounted for this possibility in its guidance even though the company is clearly focusing on profitability as it rebalances its business.
The stock climbed through the end of the month, but then pulled back when Trivago reported quarterly results on May 1, saying that revenue fell 20% to $234.8 million, badly missing analyst estimates at $266.8 million. On the bottom line, the company flipped a $0.07 loss per share from the year before to a $0.03 per-share profit, beating expectations by a penny. Nonetheless, the stock finished that session down 5% as investors focused on the decline in revenue.
The investor response to Trivago's first-quarter earnings report shows the problem with Fuller's thinking. While the company could beef up profits by cutting back on marketing spending, it needs to do something about its declining revenue. Luckily, the company is forecasting a return to revenue growth in the second half of the year as it laps the beginning of its optimization strategy, but it's unclear how much revenue growth management is expecting.
In order to deliver the kind of profits that Fuller and others are eyeing, Trivago will have to get revenue growth consistently back to double digits. At this point, that's far from guaranteed.