Why Does Europe Offer Great Growth Potential For Travelzoo?

by Trefis Team
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Quick Take

  • Travelzoo derives over 70% of its revenue from the North American market, but its European business has been growing at a faster pace.
  • With an expanding travel and deals market, a fragmented hotel industry, low online penetration (63.2%) and a rising online ad market, we believe Europe offers considerable growth opportunities for Travelzoo.
  • Europe’s travel markets is estimated to increase from $141 billion in 2012 to ~ $180 billion by 2016; Travelzoo generates more than 75% of its revenue from the travel market.
  • Travelzoo’s European operations include its businesses in France, Germany, Spain, and the U.K, which together account for almost three quarter of the total online ad market in Europe.
  • Travelzoo has increased its headcount from 97 in Q4 2010 to 157 as of Q4 2012 and intends to continue hiring to meet the increasing demand from the region.
  • Introduction of a hotel booking platform, a diverse product portfolio and focus on highly quality deals increase Travelzoo’s competitiveness in the market.

Travelzoo (NASDAQ:TZOO) is a leading global Internet media company with over 26 million subscribers. It provides travel and entertainment companies as well as small businesses the ability to efficiently reach out to consumers to sell their products and services. Apart from its websites, Travelzoo has several publications and newsletters. In addition, Travelzoo operates Fly.com, a travel search engine and a social commerce business (Local Deals), which provides its subscribers with high quality deals for restaurants, spas, shows, concert events, etc.

Travelzoo’s services are available in North America, Europe and Asia Pacific. In Asia Pacific, its business is operated by Travelzoo (Asia) Ltd. and Travelzoo Japan K.K., under a license agreement with Travelzoo Inc. Travelzoo does not have any significant ongoing involvement with the operations of the Asia Pacific segment since its sale to Azzurro Capital Inc. in 2009.

Though Travelzoo derives over 70% of its revenue from the North American market, its European business has been growing at a faster pace. The proportion of revenue earned from the European market has increased from 12% in 2008 to 28% in 2012.

With an expanding travel and deals market combined with a lower online penetration (compared to the U.S.), we believe Europe offers considerable growth opportunities for Travelzoo. By accelerating its growth rate, we think that an increasing proportion of revenue from the European market will augur well for Travelzoo’s valuation.

See our full analysis of Travelzoo

Revenue (in $ mn)

2008

2009

2010

2011

2012

North America

71.3

77.7

87.7

108.5

108.8

Europe

9.6

16.3

25.1

39.8

42.4

Total

80.9

93.9

112.8

148.3

151.2

What Are The Growth Opportunities In The European Market?

Here are some of the factors that make Europe a lucrative market for Travelzoo -

1. Robust online travel market: Despite the ongoing debt crisis in the region, Europe is one of the fastest growing travel markets in the world. The online travel sales in Europe increased from $118 billion in 2010 to $141 billion in 2012, and is estimated to reach approximately $180 billion by 2016.

Travelzoo generates more than 75% of its revenue from the travel market (includes revenue from its travel publications, Getaway vouchers and search revenue from fly.com and supersearch.com), and thus the expanding European online travel segment is an important target market for the company.

Travel Market in Europe(In $ Bn)

2010

2011

2012

2013

2014

2015

2016

Online travel sales

118

129

141

150

159

167

176

Total travel sales

292

303

312

324

333

343

350

Online as % of total

40.4%

42.6%

45.1%

46.5%

47.8%

48.8%

50.2%

Source: eMarketer

2. Increasing online penetration: The relatively low Internet penetration in Europe (63.2%) compared to the U.S. (78.6%), presents an upside for Travelzoo as an increasing number of customers access the Internet for buying travel and entertainment packages. Only 519 million people, out of Europe’s total population of 821 million have access to the Internet which leaves a lot of scope for Travelzoo to increase its subscriber base in the future.

3. Rising online advertising market: In the first half of 2012, Europe witnessed the third highest online ad spend (+11.2%) after the Middle East & Africa (+30.3 percent) and Latin America (+20.6 %). ((Worldwide, Internet Ad Spend Grows More Than Other Media In The First Half Of 2012, Nielson, October 18, 2012)) The biggest markets by online ad spend are the U.K. (~8 billion), Germany (~7 billion), France (~3 billion), Italy (~2 billion) and Spain (~1.5 billion). Together, they account for almost three quarter of the total market.

Travelzoo’s European operations include its businesses in France, Germany, Spain, and the U.K., enabling it to leverage growth in online advertising in some of the biggest markets in the region. [1]

4. Fragmented hotel market: The hotel market in Europe is much more fragmented with smaller, independent lodgings compared to the U.S., where the market is dominated by large hotel chains. The fragmented nature of Europe’s hotel industry creates the need for standardization and comparison of prices, which is what Travelzoo’s search products offer its customers. On average, over three out of ten hotel rooms in Europe are booked online and the proportion is expected to rise in the future.

Additionally, the fragmented European hotel markets can drive growth in Travelzoo’s Getaway platform. Launched in 2011, the Getaway platform is a voucher model which is gaining popularity among medium and small size hotels as it provides them with an opportunity to stimulate incremental sales. The Getaways deals usually include a night or two at a hotel or resort within a two-hour drive or short flight from subscribers’ homes, and includes a fine-dining experience or resort credit plus other extras. Travelzoo registered 50% growth in its Getaway platform in 2012. As the company expands its presence in Europe, we expect the upward trend to continue in the future as well.

5. Local Deals Market: So far, only a small proportion of local businesses advertise online. BIA/Kelsey, a media advisory firm, estimates that local businesses’ online marketing spend will increase to $35 billion by 2014, compared to approximately $20 billion in 2010. [2] We believe that Europe will contribute a significant chunk to this growth.

The European deals business has so far lagged behind that in the U.S. However, as per Nimble Commerce, which helps media companies develop e-commerce platforms, the region is catching up as European’s deal buying habits are similar to the Americans. [3]

Factors That Can Expand Travelzoo’s Presence In Europe

One of the drawbacks of Travelzoo’s business model is the low entry barrier in the industry. In the travel segment it competes with established online travel agencies (OTAs), such as Priceline and Expedia, and established meta-search engines such as Kayak. In the local deals space, it competes with big players such as Groupon, Living Social, Google Offers, Amazon (which is investing heavily in the local deals space), as well as numerous other smaller players and local newspaper publishers in Europe.

While we agree that Travelzoo faces intense competition from existing players as well as new entrant in the market, we believe that the company is taking requisite steps to increase its competitiveness.

1. Expanding sales force: A highly trained salesforce is one of the important factors that differentiate Travelzoo from other players in the market. Hiring and training new sales staff remains a key strategy for the company to increase its foothold in Europe. In Europe, Travelzoo has increased its headcount from 97 in Q4 2010 to 157 as of Q4 2012, and intends to continue hiring to meet the increasing demand from the region.

2. Introduction of hotel booking platform: Believing that its hotel search offerings was not meeting the needs of users and hotel owners, Travelzoo has been building its own hotel booking platform and will launch the same in 2013. The hotel booking platform will enable users to book hotels directly via Travelzoo’s website or through mobile products, allowing suppliers to promote deals in a more flexible manner.

The hotel booking feature will initially be offered on Travelzoo’s websites but the company intends to roll out the platform across all products by the second half of 2013. Travelzoo aims to aggressively ramp up the number of hotels and deals offered in the latter part of 2013, and we believe that a significant portion of the expansion will be in Europe. The number of deals published in the region grew by 65% in 2012, and a large proportion of this growth was driven by the Getaway platform.

3. Diverse product portfolio & focus on high quality deals give Travelzoo a competitive edge: Travelzoo’s huge subscriber base provides it with access to big mailing lists that sets it apart from other competitors. Additionally, it has existing relationships with various hotels and can leverage its diverse product portfolio, including the Top 20 Newsletter and e-mail News Alerts to reach out to a wider audience. Even in the Local Deals space, a focus on offering only high quality deals to its user sets it apart from other established players such as Groupon.

Valuation Impact

Historically, while Travelzoo’s total revenues have increased at a CAGR of 17% between 2008-2012, revenue from its European business has witnessed a CAGR of 45%. In our model we forecast Travelzoo’s total revenue to increase at a CAGR of 6% till 2019. Assuming that the proportion of revenue from Europe increases to 40% by 2019 from the current level of 28%, revenue from Travelzoo’s European business will rise to $91 million, a CAGR of 12%.

However, if revenue from Europe grows at a CAGR of 17%, reaching $130 million over our review period, there will be a 10% upside in our price estimate for Travelzoo (assuming our forecast for US remains constant). On the other hand, if the revenue from Europe increase at a CAGR of only 7%, reaching $70 billion, there will be a less than 10% downside in our valuation.

Our price estimate of $23 for Travelzo0 is at a slight premium to the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Global Online Advertising Spending Statistics, Go-Gulf.com, May 2, 2012 []
  2. Google Plots Move From Search To Sales, Wall Street Journal, December 1, 2010 []
  3. European Deals Market ‘Catching Up’, Says Nimble’s Prashant Nedungadi, Local Onliner, February 29, 2012 []
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