This Growth Stock Offers Long Term Value

Ted is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Despite the recent run-up, Travelzoo (NASDAQ: TZOO) is poised to outgrow its valuation in a short time frame. Two of the company's segments -- Travel and Local (daily deals) -- have significant growth potential that is not currently appreciated by the market.

Here's a brief run-down on Travelzoo's business segments:

Travel - includes travel publications (Travelzoo.com, newsletters) and Getaway vouchers

Search - includes travelzoo.com/supersearch and Fly.com. Search is not a growth segment at this point except for some minor growth in Europe. Fly.com averages about 1.5 million unique visitors per month, compared to over 10 million monthly uniques for Orbitz.com and ~9 million for Kayak.com and Travelocity.com. Travelzoo.com gets 3 million to 4 million monthly unique visitors.

Local - includes daily deals. This segment has suffered from unsustainable pricing by competitors, but it is a major growth opportunity for the company.

Value Per Subscriber

Unfortunately, management does not break out subscribers for Travel and Local separately, so investors can only look at the aggregate subscriber base. As of January 30, 2013, the company has 26 million subscribers worldwide.

Since 2005, Travelzoo has averaged $6.96 in revenue for each subscriber, with the trend generally moving upward.

<img alt="" src="http://g.fool.com/editorial/images/23602/tzoo-revenue-per-subscriber_large.png" />

For purposes of valuation, I'll assume that each subscriber will generate $7 in revenue going forward.

Historically, of the $7 in revenue per subscriber, $4 is eaten up by sales & marketing and general & administrative expense. That leaves $3 in earnings before interest, taxes, depreciation, amortization, and stock-based compensation expense (EBITDAS).

At a 5x multiple, each subscriber is worth $15. If applied to the current subscriber base, the value of the Travel and Local segments is $390 million ($15 x 26 million subscribers). This value alone exceeds the current market capitalization of the company.

However, management expects the company to grow to 30 to 35 million subscribers in the near future. Assuming each subscriber is still worth $15, the implied value of the two segments is $450 million to $525 million.

Comparables

There is no perfect comparable to Travelzoo. There are travel-focused companies like Orbitz and Expedia (NASDAQ: EXPE), and there are daily deal websites like Groupon (NASDAQ: GRPN) and LivingSocial. Travelzoo's price and enterprise value multiples are lower than Expedia, Orbitz, and Priceline.

Groupon trades at 13x EV/EBITDA while Travelzoo trades at 8x EV/EBITDA. But the more important consideration is the EV/subscribers multiple. Groupon trades at $12.05 per subscriber, while Travelzoo trades at $10.55 per subscriber.

However, it wasn't too long ago that Groupon traded at a much higher enterprise value per subscriber. At that time, there was still optimism about Groupon's future growth prospects. That optimism has since died down. Travelzoo's growing and profitable subscriber base deserves a higher multiple.

But even with high growth prospects, Travelzoo is not a no-brainer. Aside from competition from Groupon for the daily deals segment, Travelzoo also faces competition from the likes of Expedia on the Travel side.

Although Travelzoo has a differentiated offering from most other travel sites, Expedia's well-established brand and aggressive overseas expansion threatens to cut off Travelzoo's growth. In addition, Expedia is working with Groupon on its own daily deals startup. Other travel companies are following suit, which means Travelzoo will have to fend off stiffer competition in the coming years.

Final Thoughts

At 8x EV/EBITDA and the potential for solid growth in the years ahead, Travelzoo looks cheap. The company's current subscriber base is undervalued by the market, and the valuation disconnect will only grow wider as the subscriber base grows.

My main concern is whether the company has durable pricing power. The company is facing "unsustainable" pricing by competitors in the daily deals segment, and while the industry cannot sustain this pricing forever, the problem is not going to sort itself out next quarter.

Overall, Travelzoo is an interesting company with high growth prospects. There are short-term concerns over growth and profitability that have allowed long-term investors to get in at a bargain price.


Ted Cooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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