Travelzoo Inc. (NASDAQ:TZOO) is a travel deals publisher that provides virtual platforms including Travelzoo websites as well as publications like newsletters and e-mail alerts to small businesses, travel and entertainment companies to help them advertise their offers. With over 24 million subscribers in North America, Europe, and Asia Pacific, Travelzoo publishes deals from more than 2,000 travel, entertainment and local companies and is the purported largest publisher of travel, entertainment and local deals.
In the past year, Travelzoo’s stock has been on a downhill journey, declining from $38 in September 2011 to the current price level of around $22. We assign a value of $26.36 to Travelzoo’s stock, which is at a premium of over 10% to the current market price.
Travelzoo is exposed to general economic trends impacting the overall online travel market such as macroeconomic headwinds led by the European crisis, slowing growth rates in emerging markets and volatile foreign exchange. Below we discuss two key trends that are directly impacting Travelzoo’s stock value.
1. Increasing Online Advertising Spending
An increasing amount of travel advertising spending is expected to migrate from traditional offline advertising channels to online advertising opportunities. The global online advertising market is growing and is projected to exceed $100 billion by 2014; and for travel specifically, International Data Corporation estimates that annual expenditures for global online travel advertising was over $5 billion in 2011 and forecasts the same to grow at a compound annual rate of 15% through 2014.
With a contribution of close to 57% to our valuation of $26.36 for Travelzoo, the advertising division is the most important segment in the company’s portfolio. Travelzoo derives revenues from the sale of advertising in North America and Europe on the Travelzoo website, the Travelzoo Top 20 e-mail newsletter, Newsflash, and from the Travelzoo Network. With a large number of publishing forums, we expect the company to benefit from a wider subscriber base.
Potential Downside: Current economic weakness could weigh on the advertising budgets
Revenue from advertising contributes over 60% to Travelzoo’s total revenues. Thus, Travelzoo’s business model is highly dependent on online advertisements through travel, entertainment and other small businesses. Advertising business is linked to the level of economic activity and is highly sensitive to economic downturns. Since consumer spending on discretionary items is greatly influenced by the state of the economy, if the current economic headwinds persist for a long time then we might witness a decline in Travelzoo’s advertising revenue.
2. Growth In Social Commerce / Deals
Social commerce is one area which has witnessed robust growth in the past few years. It is beneficial not only for users who are looking to get lucrative deals online, but also for the service providers as it significantly expands their potential user base. For customers social commerce provides them different options for restaurants, travel and entertainment within their local cities. For merchants social commerce helps them promote their products and services quickly and efficiently to a mass audience.
According to Local Offer Network, approximately 63,000 deals were published in 2010 in the U.S. alone and 40,000 were published during the first quarter of 2011 alone. Additionally, Local Offer Network estimates buying revenue to have totaled approximately $2.67 billion in 2011 more than a 100% increase from $1.12 billion in 2010. BIA further forecasts, the U.S. deals market to reach $4.2 billion by 2015. 
Travelzoo ventured into the social commerce space in August 2010, by launching a local deals service which enables customers to purchase vouchers for local businesses such as spas and restaurants. Local deals has been a significant revenue generator for Travelzoo since then, and we estimate the company to register an increase in the number of deals per market for the rest of our forecast period.
The local deals business leverages 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. We believe that this will help the company to compete with established competitors like Groupon (NASDAQ:GRPN).
We are in the process of updating our current price estimate of $30.38 for Travelzoo.Notes:
- ILM West: Rumors of Deals’ Death Are Greatly Exaggerated, BIA Kelsey, December 13, 2011 [↩]