These Two Factors Can Trigger Changes In Travelzoo’s Price Estimates

Travelzoo (NASDAQ: TZOO) is a global player in the Internet media domain with a subscriber base of 27 million. Travelzoo’s platform provides travel, entertainment, and local deals from thousands of companies. The company has been under-performing in its Search and Local deals division for the last two years. The Search division has been lagging behind due to intense competition in the segment. The Local Deals division, which is mostly conducted through a voucher program, is facing waning demand due to the complex and inflexible process in place to book and redeem them.

To address these issues, the company increased product and marketing related investments and re-positioned itself to better face changing market demands. The company developed a new hotel booking website (which is currently in the beta version), re-positioned itself from a discount offer dealer to selling packages based on client needs.  It is reducing its focus on the Search segment while still maintaining the division.

Travelzoo’s highlight for 2014 was the introduction of a new hotel booking platform, which it believed will revive its position in the industry. The platform failed to generate expected demand last year. Travelzoo is confident about reviving demand in the platform by modifying its features based on users’ feedback. However, in the event that the booking platform fails to generate sufficient traction, there could be a significant downside to Travelzoo’s valuation.

Additionally, Travelzoo’s formidable competitors in the online travel space, such as Priceline and Expedia, are posing an additional threat to the company’s future. Both of the behemoths are on an acquisition and consolidation spree. With rising competition, Travelzoo’s pricing power and its ability to attract suppliers and users, can be further dampened in the future.

Our price estimate of $11.42 for Travelzoo is at a significant premium to the current market price. In this article, we discuss two key scenarios that can significantly lower our valuation for the company.

See our full analysis of Travelzoo

Travelzoo’s Hotel Booking Feature Fails To Gain Sufficient Traction (~20% Downside)

Travelzoo introduced the hotel booking option on its websites in Q1 2014. The hotel booking platform enables users to book hotels directly via Travelzoo’s website or through mobile products, thus also allowing suppliers to promote deals in a more flexible manner. For example, loading a last minute rate for a hotel has become much easier compared to Travelzoo’s previous solution, which redirected users to the hotel’s website.

Earlier, Travelzoo offered a platform to book discounted travel and entertainment deals. Travelers had no flexibility to book according to their preferences. Also from the hoteliers’ perspective, only off season deals could be published on the website (as peak-season deals are seldom discounted). With the launch of the platform, hotels have the option of selling full-price stays under the commission based model. ^{[1] [2]}

Travelzoo’s travel segment experienced a decline in net sales in 2014, for the first time in the company’s history, post the introduction of the booking platform. The offerings were not as attractive as those of its competitors. Travelzoo’s management intends to relaunch the platform and aims to provide better content in the first quarter of 2015. ^[3] Travelzoo witnessed a 10% decline in its 2014 revenue base mainly on account of the failure of the booking platform. Travelzoo’s booking platform is still in the testing phase and the management is confident of gaining traction by tweaking its features based on user feed back.

We currently estimate Travelzoo’s total subscriber base to gradually grow by an average of 5%-6%, reaching 43 million by the end of our forecast period. However, there is a possibility that, due to the prolonged lack of traction of the hotel booking platform, the company’s subscriber base will decline significantly in the next few years. If Travelzoo’s user base declined to 24 million by the end of our forecast period, there will be a 20% decline in our valuation for the company.

Acquisitions And Consolidations By Competitors Can Further Dampen Demand For Travelzoo’s Services (~10% Downside)

Travelzoo’s hotel booking feature is eroding the very aspect by which Travelzoo was differentiated from its peers in the online travel space. The discounted deals were the unique selling point for Travelzoo, which to some extent is being overshadowed by the recent developments on Travelzoo’s platform. The hotel booking feature is similar to what other online travel agencies (OTAs) such as Priceline or Expedia offer. Given the stature and market share of these companies, it would be very difficult for Travelzoo to make the existing customers for these behemoths to switch loyalties. ^[3]

Additionally, the biggest players in the online travel space  are currently on a consolidation mode. Expedia (NASDAQ: EXPE) has recently announced its intention to acquire Orbitz Worldwide. In January 2014, Expedia acquired its marketing partner, Travelocity (Read more about the deal here). Historically, the main players in the North American online travel space were: Expedia, Priceline (NASDAQ: PCLN), Orbitz, and Travelocity. Now, Expedia might own up to 75% of the U.S. online travel market as a result of its Orbitz acquisition, according to the 2013 market shares provided by PhoCusWright. ^[4] With increased dominance, Expedia will have a price advantage over its competitors. Travelzoo earns 61% of its revenues from North America, and the revenues might be further eroded with Expedia’s increasing influence in the U.S. travel market.

Priceline is also gearing up for further acquisitions. In February, it announced its decision to raise $1.13 billion (or 1 billion euros) through a public offering of senior notes. It intends to use part of th ethe fund for acquisitions. Priceline spent around $2.5 billion net of cash acquired, on acquisitions in 2014. Priceline had around $8 billion cash on hand in the end of 2014, and the senior notes will add on to that fund. ^[5]

Travelzoo is aiming to differentiate itself from competition. According to Travelzoo’s management, the bigger OTAs are more concerned about the volume of transactions, but Travelzoo gives a lot of emphasis on its members’ satisfaction. Hence the quality of offering would differentiate it from competition. For example, Travelzoo aims to continue with the existing discounted deal format (which is its unique selling point) but it will also keep an eye on the customers’ preferred timelines.

Based on the present scenario, we estimated Travelzoo’s travel related revenue per subscriber to decrease 2% per year, reaching $2.98 by the end of our forecast period . However, there is a possibility that the consolidation by Travelzoo’s competitors, can further decline its pricing power with both its suppliers and users. If Travelzoo’s revenue per subscriber declines by an average of 5.5% per year, then our valuation for Travelzoo will decline by almost 10% .

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. First Quarter 2014 Performance and Growth Strategy Overview, Travelzoo Q1 2014 Presentation Slides, April 2014 [↩]
2. Travelzoo’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 2014 [↩]
3. Travelzoo’s Fourth Quarter Earnings Transcript, Seeking Alpha, January 2015 [↩] [↩]
4. Expedia Will Pay Orbitz $115 Million if Antitrust Complications Scuttle Acquisition, Skift, February 13, 2015 [↩]
5. Priceline Positions Itself for 2015 Acquisition Spree With $1.13 Billion Note Offering, Skift, February 24, 2015 [↩]