After touching a peak of $38 in September last year, Travelzoo’s (NASDAQ:TZOO) stock has been on a downward journey since. Last week, the stock reached a new low of $19 after the company announced its preliminary Q3 2013 earnings. Travelzoo registered a marginal sequential increase and a 5% y-o-y increase in Q2 2012 revenue, and we expect the company to post marginal improvement this quarter as well. However, it looks like Travelzoo’s hotel search offerings and group-buying voucher model is not doing as well as we had anticipated, and the company cited this as an important factor leading to a potential decline in its Q3 2012 revenue.
Travelzoo 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. The company also offers lucrative deals on hotels via its Getaway platform as well as its search engines – Supersearch and Fly.com.
Along with the preliminary results, Travelzoo also disclosed that it is in active negotiations to acquire a hotel booking website to expand and improve its hotel offerings. The fragmented hotel & lodging industry in Europe offers tremendous opportunities for growth for the online travel market. Since hotel bookings offer higher revenue per traveler compared to airlines, we think that improvising its hotel offerings should augur well for Travelzoo’s valuation.
Expanded Hotel Offering Could Increase Deals Per Market
Travelzoo extended its local deals voucher program from restaurants and museum tours to upscale resorts in North America and Europe. The Getaways deals usually include a night or two at a relatively high-end hotel or resort within a two-hour drive or short flight from subscribers’ homes and include a fine-dining experience or resort credit plus other extras.
Unlike a hotel stay listed in Travelzoo’s Top 20 emails, Getaways are targeted at subscribers in particular markets and vouchers are purchased on Travelzoo.com instead of referring customers to the hotel website for bookings. Adding a hotel booking platform to the deals business will enable Travelzoo subscribers to book deals on any night, at select hotels.
We expect this would give more traction to the Deals and Getaway platform and estimate an increase in the average number of deals per market.
Search Volume Growth For Fly.com
Until recently, Fly.com was only an airfare search engine, but in November 2011, Travelzoo added hotel and car rental search functionality to the website. Travelzoo recognizes fly.com as a meta-search opportunity with attractive economics and great synergies with Travelzoo’s core travel business like the Top 20 newsletter. The company sees particular opportunity in cross promoting deal content between Travelzoo and fly.com and at the same time aiding in making the deal content better.
We think that an improvement in Travelzoo’s hotel offerings and its commitment to better meet the needs of hotels and users would lead to a potential increase in the number of searches received on Fly.com.
We estimate Local Deals, Supersearch and Fly.com to together contribute over 31% to Travelzoo’s valuation. We believe the acquisition of a hotel booking website could further the company’s efforts in these divisions, leaving a positive impression on its overall valuation.
We will update our price estimate of $26.36 for Travelzoo post the Q3 2012 earnings release.