Here’s a brief run-down on Travelzoo Inc. (NASDAQ:TZOO)’s business segments:
Travel – includes travel publications (Travelzoo.com, newsletters) and Getaway vouchers
Search – includes travelzoo.com/supersearch and Fly.com. Search is not a growth segment at this point except for some minor growth in Europe. Fly.com averages about 1.5 million unique visitors per month, compared to over 10 million monthly uniques for Orbitz.com and ~9 million for Kayak.com and Travelocity.com. Travelzoo.com gets 3 million to 4 million monthly unique visitors.
Local – includes daily deals. This segment has suffered from unsustainable pricing by competitors, but it is a major growth opportunity for the company.
Value Per Subscriber
Unfortunately, management does not break out subscribers for Travel and Local separately, so investors can only look at the aggregate subscriber base. As of January 30, 2013, the company has 26 million subscribers worldwide.
Since 2005, Travelzoo Inc. (NASDAQ:TZOO) has averaged $6.96 in revenue for each subscriber, with the trend generally moving upward.
For purposes of valuation, I’ll assume that each subscriber will generate $7 in revenue going forward.
Historically, of the $7 in revenue per subscriber, $4 is eaten up by sales & marketing and general & administrative expense. That leaves $3 in earnings before interest, taxes, depreciation, amortization, and stock-based compensation expense (EBITDAS).
At a 5x multiple, each subscriber is worth $15. If applied to the current subscriber base, the value of the Travel and Local segments is $390 million ($15 x 26 million subscribers). This value alone exceeds the current market capitalization of the company.
However, management expects the company to grow to 30 to 35 million subscribers in the near future. Assuming each subscriber is still worth $15, the implied value of the two segments is $450 million to $525 million.
Comparables
There is no perfect comparable to Travelzoo Inc. (NASDAQ:TZOO). There are travel-focused companies like Orbitz Worldwide, Inc. (NYSE:OWW) and Expedia Inc (NASDAQ:EXPE), and there are daily deal websites like Groupon Inc (NASDAQ:GRPN) and LivingSocial. Travelzoo’s price and enterprise value multiples are lower than Expedia, Orbitz, and Priceline.com Inc (NASDAQ:PCLN).
Groupon Inc (NASDAQ:GRPN) trades at 13x EV/EBITDA while Travelzoo Inc. (NASDAQ:TZOO) trades at 8x EV/EBITDA. But the more important consideration is the EV/subscribers multiple. Groupon trades at $12.05 per subscriber, while Travelzoo trades at $10.55 per subscriber.
However, it wasn’t too long ago that Groupon Inc (NASDAQ:GRPN) traded at a much higher enterprise value per subscriber. At that time, there was still optimism about Groupon Inc (NASDAQ:GRPN)’s future growth prospects. That optimism has since died down. Travelzoo’s growing and profitable subscriber base deserves a higher multiple.
But even with high growth prospects, Travelzoo is not a no-brainer. Aside from competition from Groupon for the daily deals segment, Travelzoo also faces competition from the likes of Expedia on the Travel side.
Although Travelzoo has a differentiated offering from most other travel sites, Expedia Inc (NASDAQ:EXPE)’s well-established brand and aggressive overseas expansion threatens to cut off Travelzoo Inc. (NASDAQ:TZOO)’s growth. In addition, Expedia is working with Groupon Inc (NASDAQ:GRPN) on its own daily deals startup. Other travel companies are following suit, which means Travelzoo will have to fend off stiffer competition in the coming years.
Final Thoughts
At 8x EV/EBITDA and the potential for solid growth in the years ahead, Travelzoo looks cheap. The company’s current subscriber base is undervalued by the market, and the valuation disconnect will only grow wider as the subscriber base grows.
My main concern is whether the company has durable pricing power. The company is facing “unsustainable” pricing by competitors in the daily deals segment, and while the industry cannot sustain this pricing forever, the problem is not going to sort itself out next quarter.
Overall, Travelzoo Inc. (NASDAQ:TZOO) is an interesting company with high growth prospects. There are short-term concerns over growth and profitability that have allowed long-term investors to get in at a bargain price.
The article This Growth Stock Offers Long Term Value originally appeared on Fool.com and is written by Ted Cooper.
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