A Smart Call on Travelzoo (and the Industry)
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On Friday shares of Internet travel/deal company Travelzoo (NASDAQ: TZOO) fell over 14% after the company issued weak guidance for Q3 citing hotel search offering and group-buying vouchers not meeting the needs of hotels and users well enough. The guidance created selling pressure for other stocks in the space, including Orbitz and Priceline. Therefore, with global weakness and questions in the U.S. economy is it time to sell Travelzoo? And are there any good plays in the space?
A Foolish Travelzoo Call
Last year, I chose Ralph Bartel as part of an exclusive list as the worst CEOs/directors of 2011. Looking back, he wasn’t necessarily the worst, he was rather the smartest. You see while CEO Christopher Loughlin was pumping shares of the stock on Mad Money and CNBC (at $80), Ralph Bartel was selling shares as fast as he could. The executive sold a mindboggling 2.5 million shares for an average price of $76.55. Today, the stock is trading at $20, a market cap of $320 million, which is about 50% greater than the total “take home” for Bartel during his selling spree. So although greedy, I must say it was very smart of the executive to see that this company was a dead-end stock that had reached its peak.
For the sake of argument we could identify that TZOO is now the cheapest its been in many years in terms of valuation, and that the deals space is a very large industry. TZOO was celebrated in 2011 as it showed explosive growth in North America, exceeding 23 million subscribers, had initial success in Asia and Australia, and even posted very impressive growth in Europe. However, one year later, the company is now expecting a significant year-over-year loss. And honestly, I am really surprised that its fall wasn’t more dramatic on Friday.
Analysts were expecting revenue of $39.2 million, TZOO guided $35-$35.5 million. Analysts were expecting EPS of $0.29 and TZOO guided $0.20-$0.22. This is by all measures a huge miss. And due to the lack of barriers to entry in this space, and Travelzoo’s apparent loss of momentum, I can’t find one reason to buy this sinking ship. In fact, if I were an investor in this company then I would be jumping for joy that it only fell 14% on Friday. Because on Thursday, the Dollar Tree announced its earnings near the bottom range of expectations and it lost 8%. Meanwhile Travelzoo missed by a long shot, it wasn’t even close, therefore I’d watch for more selling pressure and a price-per-share in the single digits in the next six months.
Like I said, this is a business that has very few barriers to entry, but is also a business controlled by the mighty. Orbitz Worldwide (NYSE: OWW) is the other dog of the bunch, but even its loss is nowhere near that of Travelzoo. Orbitz fell nearly 6% on the news of Travelzoo, and with three years of minimal growth, this is another stock that I would avoid. Surprisingly, the almighty Priceline (NASDAQ: PCLN) fell nearly $5 per share on the news of Travelzoo. This is a stock down nearly 20% since May, after issuing lower guidance for two consecutive quarters. The stock is currently trading at just 16.36x next year’s earnings, which I think is attractive, considering the valuation of some internet based companies. Other than Priceline I like the valuation and growth of TripAdvisor (NASDAQ: TRIP). I think TripAdvisor has a good presence in the space, and could grow for several years to come. However, the key point to remember with each of these companies is that it’s a trendy space, and that any company can quickly become a dead-end investment, much like Tavelzoo.
BrianNichols has no positions in the stocks mentioned above. The Motley Fool owns shares of Priceline.com and TripAdvisor. Motley Fool newsletter services recommend Priceline.com, Travelzoo, and TripAdvisor . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.