Remember the big hype before the Groupon Inc (NASDAQ:GRPN) IPO in 2011?
During the months leading up to the IPO, every company with exposure to the local daily deals industry saw significant upside as investors looked for a spillover play. Travelzoo Inc. (NASDAQ:TZOO) was caught up in this hype and a resulting short squeeze ensued, sending shares from $40 per share all the way up and above $100. The bubble eventually burst as the Street realized this business model was easily replicated. Shares of both Groupon Inc (NASDAQ:GRPN) and Travelzoo Inc. (NASDAQ:TZOO) traded sharply lower in the following years.
So, what has changed today?
Travelzoo has always been a solid company, but at times, may have been overvalued. The company is currently in the process of revamping its mobile platform and is growing its subscriber base through mobile and social media campaigns. At this point, I would like to make the argument that shares are undervalued considering the growth potential ahead.
Revamping the mobile platform
The company currently draws over 35% of its traffic to its mobile platform and mobile applications. This number grew 248% over the last year and I expect to see further increases as society becomes increasingly mobile. The company’s current mobile platform is not suited to handle these customers as it lacks the ability for customers to book directly from the platform. Customers are instead sent directly to the hotel websites, which may or may not offer customers the ability to book from their mobile device. This problem has lead to frustration among customers and has resulted in lower revenue for the company. In addition, no date or destination search functions are available to customers.
During the first and second quarters, the company worked hard at upgrading its platform. The new platform is set to roll out in the third and fourth quarters this year, and will allow customers to book directly from mobile applications. Customers will see more functionality as the new application will replicate the company’s desktop platform. Once finished, the company expects to aggressively ramp up its hotel and local deal options.
We should see the company’s revenue increase greatly as it begins to convert a significantly higher percentage of its mobile users. The company has estimated that this revamp will cost roughly $0.07 to the EPS over the first and second quarters. However, these costs are insignificant when you consider the possibility of the company increasing its revenue from its mobile platform.
Socially active
Management has focused its attention on social campaigns. The company’s revenue is in direct correlation with the company’s subscriber base. As of the most recent figures, the company has over 22.5 million subscribers, each of whom generate $7.51 in revenue. In the last year, the company has been very successful in increasing its social presence. The following tables were pulled from the most recent shareholder presentation:
I expect to see subscriber growth rates follow the astonishingly high social growth rates going forward. Its mobile application has been downloaded over 1.6 million times, and the company reported many of these downloads were a result of its social campaigns. When users see their friends or contacts using Travelzoo Inc. (NASDAQ:TZOO), they are more likely to then give the company a try, or at least become familiar with the brand name.
Relative valuation
Travelzoo currently trades at 22 times earnings, while sporting revenue and net income growth rates of 7% and 49%, respectively. I expect to see this growth rise as the company begins to capture revenue from its mobile users. The industry is currently trading at an earnings multiple of 26 times. The largest player in the space, Priceline.com Inc (NASDAQ:PCLN), currently trades at 25.3 times earnings with an estimated EPS growth rate of 20%.
Priceline.com Inc (NASDAQ:PCLN) dominates the online hotel booking space with 97% of its revenue coming from this business. Shares have performed very well over the last few years and are currently at 52-week highs. Priceline.com Inc (NASDAQ:PCLN) reported very strong growth of 43% internationally earlier this month as a result of its European and Asian markets. Going forward, this company is in a solid position to benefit from rising incomes and ages in China, which bodes well for sustained long-term growth.
Conclusion
Travelzoo Inc. (NASDAQ:TZOO) has emerged as a major player in the online travel space. The company should at least trade at the industry multiple which would place shares at $33. Going forward, the mobile platform release will allow the company to convert a higher percentage of its mobile users, which should result in much higher revenue growth.The focus on social media has proven very successful, and these campaigns should lead to a higher percentage of mobile users in the years ahead. Consider Travelzoo Inc. (NASDAQ:TZOO) as a high quality alternative for exposure to the online travel industry.
The article Buy This Stock on Management’s Strategic Focus originally appeared on Fool.com is written by Nathaniel Matherson.
Nathaniel Matherson has no position in any stocks mentioned. The Motley Fool recommends Priceline.com. The Motley Fool owns shares of Priceline.com. Nathaniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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