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Investment Overview for Travelzoo (NYSE:TZOO)
Below are key drivers of Travelzoo's value that present opportunities for upside or downside to the current Trefis price estimate for Travelzoo:
- Advertising Revenues per Subscriber: Travelzoo saw its Advertising Revenues per Subscriber fall from $5.4 in 2007 to $3.3 in 2012, due to increasing competition in the online advertising space. As competition in the online advertising space intensifies and weak macroeconomic data lead to curtailed advertising budgets, we expect Advertising Revenues per Subscriber to steadily decline to below $3 by 2019. However, if Travelzoo is able to increase the advertising rates charged from merchants by continuously expanding the reach of its publications, there can be an upside to the current Trefis estimate for Travelzoo. The firm aims to increase advertising rates at least once a year in each market that it operates in. With an increase in the reach of Travelzoo’s publications, the company raised its advertising rates in Jan 2010 & 2011. Travelzoo also increased its advertising rates on select listings in Europe on four occasions between the same period. If Travelzoo can maintain its Advertising Revenues per Subscriber at the current levels by the end of our forecast period, there could be a 10% upside to the Trefis price estimate for Travelzoo's stock. On the other hand, if Advertising Revenues per Subscriber declines at a much faster rate of 7% per year instead of the currently assumed rate of 3%, there could be an over 10% decline in our current price estimate for Travelzoo.
- Average Number of Deals per Market: Travelzoo managed to sell 0.41 deals per week on an average over the Aug - Dec 10 time frame. The number more than doubled in 2011 to 0.8 deals and further increased to 1.2 in 2012. We estimate the same to steadily increase to 2.8 by the end of our forecast period. The local deals business derives advantages from Travelzoo’s subscriber base for other products like the Top 20 Newsletter by providing it access to big mailing lists, as well as serving as a great fit given its trained sales force who have prior experience in selling local offers. This helps Travelzoo compete with deal giants like Groupon at an early stage compared to other competitors. The company is also entering into new partnerships like the one forged with iCare, the marketing organization for Sysco (the largest food distributor in North America). If Travelzoo is able to expand its deal offerings to about 4 deals per week per market by the end of our forecast period, there could be a close to 10% upside to the Trefis price estimate for Travelzoo's stock. However, low barriers to entry and minimal start up costs have led to a rise to a number of competitors in the deals space. Coupled with lack of user stickiness, this can adversely impact the rate at which Travelzoo plans to launch new deals. If Travelzoo is able to offer only 1.5 deals per week per market by 2019, there would be a 5% downside to the Trefis price estimate for Travelzoo.
Travelzoo is a global internet media company. The firm currently has a subscriber base of 26 million and has operations in North America, Europe and the Asian Pacific region. Travelzoo provides travel and entertainment companies as well as small businesses the ability to efficiently reach out to consumers to sell their services and products. Apart from the main Travelzoo websites, the company also has several publications and newsletters across the globe which help it connect with its subscribers. It also operates Fly.com, a travel search engine that provides users the ability to find the best prices on flights from airlines and travel agencies. In August 2010 the firm ventured into the social commerce space by launching a local deals service which enables customers to purchase vouchers for local businesses such as spas and restaurants.
Differentiation and prior local offers experience acts as a competitive advantage
Travelzoo is differentiating itself from group-buying sites like Groupon, Living Social and AOL’s Wow.com by leveraging its existing hotel relationships and offering higher-end deals, often for hotel spa's and hotel restaurants.
The local deals business derives advantages from Travelzoo’s subscriber base for other products like the Top 20 Newsletter by providing it access to big mailing lists
as well as serving as a great fit given its trained salesforce who have prior experience in selling local offers. This helps Travelzoo's local deals compete with larger competitors like Groupon right at an early stage.
Revenue synergies with other Travelzoo businesses to drive volumes for local deals
Travelzoo can package local deals with placements in the Travelzoo Top 20 newsletter, the company’s core product.
This will help Travelzoo expand its reach, thereby driving higher local deal volumes.
Travelzoo's search engines, Supersearch and fly.com, which directs customers to ticket booking sites, can generate traffic for local deals based as people also look for things to do upon arrival at a destination. The deals business can provide interesting entertainment and dining options. This presents an opportunity to leverage the expansion of search businesses by increasing the number of deals offered.
Europe online advertising growth to provide momentum
The company has more opportunities for subscriber growth and ad rate increases in Europe as the business in the European region is less developed than that of North America. There are over 25 million subscribers in North America compared to around 9 million in Europe.
The biggest online markets by ad spend are the UK, Germany, France, Netherlands, Italy and Spain respectively. Together, the top six account for almost three quarters (74 per cent) of the total market. Travelzoo European operations include its businesses in France, Germany, Spain, and the U.K, thereby enabling it to leverage the online advertising growth in Europe through its presence in the most attractive markets in the region.
Launch of hotel search to power search volumes growth for fly.com
Initially, Fly.com was only an airfare search engine enabling users to find and compare flight options and real-time fares from hundreds of airlines and major travel websites. In November 2011, Travelzoo officially launched a hotel and car rental search functionality on fly.com. After entering the search criteria, results can be filtered in several different ways to best fit travelers needs which include pricing, star-rating, location, amenities and type of property (resort, hotel, B&B or even hostel). Although Fly.com searches many hotel and online travel agency websites, users are encouraged to compare rates using the check boxes to find the best deal. Another key feature for travelers is extensive hotel detail pages that include virtual tours, detailed amenity checklists, hotel policies and honest user reviews.
Unlike air ticket bookings, hotel reservations require the travelers to conduct extensive search for best fares. Fly.com simplifies a users search by providing easy comparison of fares from different online travel agencies.
Increasing online advertising spend
Estimates from BIA Advisory Services and Kelsey Group have indicated that US local advertising revenues will reach $145 billion by 2013. The growing presence of online advertising has impacted traditional media outlets such as TV and newspaper, which have seen a considerable decline in ad spending over the past years. There are several reasons why spending on online advertising is increasing.
- The internet is widely becoming the preferred source of information.
- Inherent benefits of online advertising (real time updates and performance tracking) vs traditional media approaches.
- The internet allows advertisers to advertise their sales and specials in a fast, flexible and cost effective manner.
- Suppliers are selling directly to consumers from their websites rather than through travel agents.
Economic weakness to weigh on advertising budgets
The advertisement business is also highly sensitive to economic downturns and the demand for online advertising is linked to the level of economic activity and employment in the U.S. and abroad. Travelzoo’s business model is highly dependent on online advertisements through travel, entertainment and other small businesses. Since consumer spending on discretionary items is highly influenced by the state of the economy, future economic headwinds may impact ad spending by companies.
Growth in social commerce
The social commerce space is one that has demonstrated immense growth in the past few years. It provides customers with different options for restaurants, travel and entertainment within their local cities. On the other hand, it enables merchants to promote their products and services quickly and efficiently to a mass audience.
BIA forecasts, the US deals market to reach $4.2 billion by 2015.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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