Like most of the travel sector, Trivago (TRVG 0.43%) has been hit hard by the pandemic, as revenue has fallen sharply from pre-pandemic levels. The stock is mostly unchanged from where it was two years ago, but the company has taken significant strides to cut costs and restructure its business, though those changes have been overshadowed by the challenges from COVID.
In its fourth-quarter earnings report, the company rebounded from the depths of the pandemic a year ago and delivered strong earnings before interest, taxes, depreciation, and amortization (EBITDA) margins. Revenue was up 176% to 89.1 million euros, though that was still down 43% from Q4 2019. Adjusted EBITDA margin also hit a record for the accommodation-booking specialist at 22%, with EBITDA reaching 19.6 million euros.
While the market has mostly forgotten Trivago -- the stock barely moved on the report on Wednesday -- 2022 could mark a comeback for the banged-up travel stock. Here are three reasons why.
1. The pandemic may finally end
There are some signs that 2022 could be the year in which the COVID-19 pandemic comes to a close, or at least becomes endemic, meaning it's treated as a part of normal everyday life. Evidence shows that the omicron variant is less severe than earlier strains, and an increasing percentage of the world's population is becoming vaccinated or has gained natural immunity.
Restrictions on travel and policies like masking are also starting to be loosened. A number of states in the U.S. have begun lifting masking mandates, and the U.K. could lift all virus restrictions as early as this month. Several countries in the E.U. have also said they're eliminating requirements for entry, such as a negative test, if you're already vaccinated.
Trivago said its sees a direct connection between restrictions being lifted and bookings on its platform. Often, travelers don't want to deal with inconveniences, such as testing or even quarantining, that have been necessary to travel.
Though the company didn't give specific guidance, it said that growth had improved in January from December and expected that trend to persist in the first quarter. While the company is sanguine about labor shortages impacting the recovery, it's optimistic about momentum building into the spring and summer.
2. Costs have been significantly reduced
The record EBITDA margins in the fourth quarter are a promising sign for the company as the travel market recovers. Trivago significantly reduced its cost base over the last two years, laying off staff and slashing its office space. It's also made its marketing more efficient, and those steps should lead to wider profit margins as the travel sector bounces back.
In a normal environment, most of company's revenue goes to sales and marketing expenses, which are expected to ramp up later in the year, but general and administrative expenses and technology costs should remain relatively in line with Q4 2021 levels, so the company will gain operating leverage as revenue increases.
The company predicted that total operating expenses would be below 2020 levels, which is good news for the company's long-term profitability.
3. New business lines are emerging
While Trivago will always primarily be an accommodations-booking service, the company has begun B2B services that monetize the data it generates from travel searches. The company is in the early stages of developing this business, partnering with companies like Huawei and an online ticketing platform, among others, in what it calls metasearch-as-a-service.
With Huawei, the Chinese tech giant is using Trivago to power its online hotel bookings, and Trivago shares bookings revenue with it. As this gains scale, it should be a higher-margin line of business as it leverages Trivago's tech infrastructure that's already in place, and allows it to tap into a new customer base.
Trivago categorizes this business as "other revenue." It only had 5.4 million euros in other revenue in Q4, but that figure should accelerate this year and could be an important profit driver down the road.
Trivago has been trading in penny stock range for several years now and has missed out on some of the recovery tailwinds that other travel stocks have gotten. However, based on run-rate EBITDA from the fourth quarter, the stock is trading at just 11 times EBITDA, making it look surprisingly affordable, especially since its revenue will surge again this year. If Trivago can deliver bottom-line growth, as well, the stock should move higher this year.