Here’s Why Travelzoo’s Growth Will Re-accelerate In 2014

by Trefis Team
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Travelzoo (NASDAQ:TZOO) is a leading Internet media company that earns money via advertising, searches on its website, and travel and entertainment deals. The company had been growing strongly since 2007. However, this growth significantly slowed in 2012 and 2013 due to sluggish performance of the advertising division, moderation in the deals business, and reduction in search marketing spend. The company also made heavy investments in building its hotel booking platform which weighed on its operating margins.

Despite the downbeat performance in 2012 and 2013, we think that Travelzoo is in a good position to leverage future growth in the online travel industry. The company is building a proprietary hotel platform to offer bookings on its own website and mobile products. It also intends to divert investments toward the declining search business once the hotel platform is rolled out.

Our price estimate of $23.48 for Travelzoo’s stock is almost in line with its market price. The following table summarizes our forecast for Travelzoo’s revenue from different segments.

We expect the company’s growth to re-accelerate in 2014. In this article, we highlight the key points that support our analysis.

New Hotel Booking Platform To Start Bringing In Revenues From 2014

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. The company has a subscriber base of 23 million users in North America and Europe, which is attractive to advertisers (travel and entertainment companies). [1] Advertising contributes to around 50% of Travelzoo’s valuation, as per our estimate.

Realizing that its hotel search offerings were not meeting the needs of users and hotel owners, Travelzoo started building its own hotel booking platform towards the latter half of 2012. The hotel booking platform will enable users to book hotels directly via Travelzoo’s website or through mobile products, thus allowing suppliers to promote deals in a more flexible manner; e.g. loading a last minute rate for a hotel will become much easier compared to Travelzoo’s current solution, which redirects users to the hotel’s website. The new platform will attract advertisers as users will spend more time on Travelzoo’s website.

The hotel booking platform is still under development. The beta testing of the feature is expected to begin in Q1 2014. Since revenue is recognized when the stay occurs and not the booking, the platform is expected to start generating revenue in the second half of 2014. We believe that Travelzoo’s entry in hotel bookings is a good long term strategy, as it opens up an additional revenue opportunity for the company. In our view, Travelzoo’s growth will accelerate as the platform scales up. To learn more on how the hotel booking feature can drive Travelzoo’s growth, read our article: Travelzoo’s Hotel Booking Feature Can Help Drive Big Growth

Search Business And Operating Margins To Improve Post Hotel Platform Rollout

Building the hotel platform has required Travelzoo to make heavy investments. The company has so far incurred $2.8 million on headcount and development costs related to the platform and it expects to incur another $1.1 million in Q4 2013. [1] These investments have weighed on the company’s EBITDA margins, which fell by 460 basis points year on year to 19% for the first nine months of 2013. We expect margins to stabilize in 2014 due to reduction in investments  and incremental revenue from the hotel platform.

The need to balance investments has forced the company to reduce spending on search marketing, resulting in lower search revenue. We believe that search revenue could increase after the hotel platform is rolled-out, as Travelzoo shifts its focus towards bolstering growth in the search business and increases its search marketing spend.

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Notes:
  1. Third Quarter 2013 Performance and Growth Strategy Overview, Travelzoo Investor Relations, October 17, 2013 [] []
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