This Online Travel Stock Looks out of Gas

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

Finding deals online is how modern consumers make their decisions. This is true for the travel industry as well. Various deal and booking sites fight for the growing number of customers. Travelzoo (NASDAQ: TZOO) is one of them. The stock has had a good year, up 53%. However, the recent earnings report was taken coldly despite the fact that the company had beaten estimates on both revenue and earnings. Investors wanted more. Would this end the uptrend that persisted throughout this year?

Slower growth

The revenue grew 4.8% in comparison with the second quarter of last year. The number of site subscribers advanced 4%. At the same time, earnings were down 25%. Investment expenses were the reason for that. The continuing shift to mobile has made the company work in the app field.

The company states that 40% of its traffic comes from mobile devices, and there were usability issues on these devices. In addition to that, the company is working to enable booking from the site itself. Travelzoo has increased its headcount by 18.7% from a year ago, and continues to see the declining trend in the average annualized revenue per employee.

The company states that the quantity of the site’s subscribers directly influences revenue. Currently, it has 23 million subscribers. The company expects to get $167 million in revenue – or $7.44 in revenue per subscriber. Travelzoo states that at 30 million subscribers it would get $210 million in revenue, with $7 revenue per subscriber. It would take the company three years to get there at current rates of subscription base growth. Three years to grow 26% is not what you expect from a growth stock. That's why investors are disappointed.

Tough competition

The competition in the field is tense with the likes of Expedia (NASDAQ: EXPE) and TripAdvisor (NASDAQ: TRIP) each wanting its piece of the travel pie. Expedia has been under pressure since its first-quarter report, when the company issued soft guidance. The stock is still underperforming, up 4% this year. On the other side, TripAdvisor is having a good year, up 75%. The company exceeded second-quarter earnings estimates. Average unique monthly visitors grew 57%. Mobile users continued to flow in. Visits via a tablet or a smartphone were up 216% year over year. TripAdvisor was fast to bet on mobile, and now it enjoys the results of that bet. 

However, monetization still lags. Smartphone monetization remains at less than 20% of desktop. Over time, this would probably improve as customers get accustomed to making purchases via their smartphones. Mobile is the trend that is here to stay, there is no doubt about that. Both Expedia and Travelzoo are behind on this front, and this helps TripAdvisor trade at a significant premium to its peers. 

Valuation

Travelzoo is trading at 21.5 times forward P/E and 2.87 times its price to sales. Expedia trades at 16.8 forward P/E and 2.05 P/S. TripAdvisor’s capitalization has gone ahead of its revenue, and the firm is trading at 10.83 times sales. If judged by forward P/E, the company is the most expensive, trading at 32.28 times. Among these stocks, only Expedia pays dividends, and it yields 0.82%.

Travelzoo has no debt on its balance sheet. This is not the case with Expedia, which has $1.25 billion of long-term debt. The company’s debt-to-equity ratio is 0.58, a relatively high one. TripAdvisor is not debt-free either, having a 0.49 debt-to-equity ratio. However, the debt load does not seem to put any pressure on the valuation of any of those shares.

Bottom line

Travelzoo shares look elevated and pose a risk of correction. The company must provide better growth of its subscription base. Otherwise, the pace of the stock appreciation is not sustainable. Travelzoo must enhance its mobile presence, or it could be unable to grow beyond the small company it is now.

Expedia is struggling to post meaningful growth and is likely to stay where it is now until it publishes its quarterly report. It does not look like a growth story at the moment. 

TripAdvisor is trading at a premium due to its lead in mobile, which is a hot topic nowadays. The company must show how it extracts more value from the mobile user before the stock could continue its way upward. After the recent surge in price, it looks overvalued to me. 

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Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends TripAdvisor. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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