TZOO - A Good Buy Rating: Travelzoo Looks Poised For Upside

2023-11-04 07:09:03 ET

Summary

• Travelzoo is an internet media company that generates revenue through travel advertising and exclusive deals curated by global experts.
• The introduction of Travelzoo META allows the company to cater to the demand for immersive travel experiences in the Metaverse.
• The share repurchase program reflects management's positive outlook and business confidence.
• TZOO faces market challenges like competitive rivalry, economic conditions, and geopolitical tensions, necessitating a flexible strategic approach.
• Still, my valuation model suggests a 27.7% upside potential for TZOO, prompting a "buy" rating despite sector risks.

Travelzoo (TZOO) showcases a commendable trajectory marked by strategic evolution and potential for growth. Essentially, TZOO is an internet media company generating its revenue primarily through travel advertising. The company sets itself apart by offering carefully selected, exclusive deals evaluated rigorously by a team of global experts. These exclusive deals not only highlight TZOO's distinct value but also contribute to its expanding membership base. This model, which merges advertising revenue with membership growth, positions TZOO favorably in a competitive market. Furthermore, with the introduction of Travelzoo META, TZOO ventures into the Metaverse, aiming to cater to the contemporary consumer's desire for immersive travel experiences. Additionally, the management's share repurchase program indicates a positive outlook. My valuation model suggests a 27.7% upside potential for the stock, leading me to assign a "buy" rating to TZOO despite the known volatility in the online travel sector.

Business Overview

Travelzoo operates as an internet media entity, primarily anchoring its revenue streams on advertising within the travel domain. Established in 1998, TZOO has cemented its status, boasting a global membership exceeding 30 million. TZOO publishes offers from several travel corporations, which renders valuable exposure for these entities. The business, alongside its subsidiaries, unveils a diverse range of travel, entertainment, and local deals globally sourced from various establishments. TZOO not only offers exclusive deals but also curates one-of-a-kind experiences meticulously reviewed by its global network of deal experts. The overarching aim is to deliver unparalleled travel, entertainment, and lifestyle experiences to its members.

In my view, the breadth and uniqueness of offers, curated and reviewed by seasoned experts, form the cornerstone of TZOO's value proposition. This personalized curation, I believe, is what keeps its substantial membership base engaged and continually growing. The company's advertising-driven revenue model seems to be symbiotic; as TZOO provides visibility for travel and entertainment companies, it, in turn, garners a wide array of exclusive deals for its members, thus enhancing its appeal and member loyalty.

Additionally, TZOO combines an advertising-revenue model and a large, expanding membership. This strategy places TZOO in a promising position within the competitive online travel marketplace amidst established and up-and-coming players. The ability to offer exclusive deals, especially in a post-pandemic world where consumers are keen on traveling but are also price-sensitive, in my opinion, grants TZOO a competitive edge. This edge could be further sharpened by strategic expansions like Travelzoo META, hinting at an innovative drive to stay ahead in the game.

Travelzoo META is a premium, members-only service delivering pioneering Metaverse travel adventures. Through collaborations with innovative creators, TZOO offers the newest immersive experiences to enable members to venture into remote global corners, traverse through time, or explore fantastical spaces beyond conventional imagination. This initiative commenced receiving payments from founding members in Q3 2023.

TZOO's Financial Voyage in Q3 2023

Despite the enduring appeal of travel, the sharp uptick observed last year is starting to level off, especially in North America and the UK, attributed to rising costs of hotels and flights. Nonetheless, a strong demand outlook for the upcoming holiday season is anticipated, albeit at a moderated pace. The expected decrease in activity was only partially realized owing to higher new voucher sales and purchases in Q3. However, TZOO expects a further reduction in merchant payables and an increase in cash in the upcoming quarters.

Regarding geopolitical tensions, TZOO's executives clarified that the offers about the Middle East constitute a small fraction of TZOO's deals. Hence, revenue implications due to geopolitical issues are minimal as members exhibit flexibility towards alternative destinations. This narrative continues from the substantial growth and profitability observed for TZOO, driven primarily by the European segment and the "Jack's Flight Club" venture to help subscribers find cheap flights. TZOO is exploring new deal categories and propelling a "metaverse" initiative for virtual travel experiences. Although a developing part of the business, this initiative underscores a strategic move toward long-term innovative growth.

A Seemingly Cheap Valuation

In TZOO's latest Q3 2023 results, it reported a GAAP EPS of $0.17, missed expectations by 0.04, and a revenue of $21.13 million, falling short by $59 thousand. The global membership slightly increased to 31.2 million as of September 30, 2023, from 30.5 million the preceding year. Membership in North America remained constant at 16.3 million, while a slight increase was observed in Europe from 9.1 million to 9.3 million. Additionally, the subscription count for "Jack's Flight Club" rose from 1.9 million to 2.3 million within this period.

Furthermore, the Stock Purchase Agreement initiated between Travelzoo and JFC Travel Group Co., along with Mikhail Mayzenberg and Philip Wintermantle, represents a strategic endeavor to expand Travelzoo's operational domain. This initiative is likely aimed at bolstering Travelzoo's market position or diversifying its revenue streams. Following this, on October 24, 2023, Travelzoo launched a share repurchase program , indicating business confidence. This program has a budget of up to $7.88 million for buying back TZOO shares, which could potentially support stock prices. In their recent earnings call , Travelzoo reported a revenue increase and a 2.3% YoY rise in member count, from 30.5 million to 31.2 million unduplicated members, suggesting a positive trend in user growth. This growth may validate the ongoing revenue recovery efforts of TZOO since 2020. It's noteworthy that the current revenue stands at $81.9 million in the TTM, which is quite a contrast to the $170.6 million revenue of 2013. This decrease in revenue primarily stems from substantial investments in new platforms and business model changes that did not yield the anticipated results promptly. Additionally, TZOO experienced a revenue decline in the Local Deals and Search segments, owing to business model adjustments and decreased marketing spending, coupled with elevated operating expenses, highlighting the financial implications of these strategic transitions or possibly strategic miscalculations.

Nevertheless, to estimate TZOO's intrinsic value, it's worth noting that it operates in the leisure and recreation sector, specifically as an internet media company providing travel, entertainment, and local deals. The industry is poised for growth, with the Recreation Services Market anticipated to grow at a CAGR of 5.9% from 2023 to 2028, the global leisure travel market projected to grow at a CAGR of 8.8% from 2022 to 2028, and the global recreation market expected to grow at a CAGR of 3.7% leading up to 2027. These growth trends, driven by stable economic conditions and an increase in consumer spending on leisure and travel, present a favorable environment for Travelzoo, potentially benefiting its various segments like Travelzoo North America, Travelzoo Europe, and Jack's Flight Club, by aligning with the rising consumer demand for travel and leisure experiences.

In determining an appropriate valuation for TZOO, I find it reasonable to employ the average of the previously mentioned CAGRs (6.1%) as the estimate for the terminal growth rate. This approach, when integrated with ongoing analyst revenue projections alongside variables such as EBIT, D&A, CAPEX , NOWC margins, and effective tax rates, generates my DCF model.

As you can see, my valuation model suggests a 27.7% upside potential for TZOO from its current levels. This optimistic projection primarily stems from the company's consistent revenue growth, anticipated to reach a terminal revenue of $123.1 million by 2027. A closer examination of TZOO's operational enhancements and share repurchase initiative reveals a positive trajectory. Moreover, the company's robust financial health, marked by a net cash position, and the apparent undervaluation of its stock contribute to my recommendation of a "buy" rating for TZOO.

Risks to the Investment Thesis

However, as enticing as TZOO seems, it's worth noting it faces several risks. The online travel market is fiercely competitive, with well-funded players that could overshadow TZOO's market share. The company's revenue, heavily tied to advertising, is vulnerable to economic conditions, which could lead to reduced advertising budgets in a downturn, impacting TZOO's financials. Geopolitical tensions, although having minimal impact due to member flexibility towards alternative destinations, could escalate, affecting the business. Moreover, being a global entity, TZOO's financial performance is susceptible to currency exchange rate fluctuations. The recent misses in Q3 2023 earnings and revenue underscore the industry's volatility, which could negatively affect investor sentiment and stock valuation.

The emergence of competitive platforms and alternative lodging options like Airbnb further muddies the waters, indicating a swiftly changing market with new players challenging traditional offerings. Travelzoo's hurdles mirror a larger industry narrative of disruption, competition reconfiguration, and the necessity for strategic nimbleness. Additionally, governance concerns, such as the repricing of the CEO's options during a crisis and a perceived costly private share issuance for acquiring a metaverse travel agency, highlight potential internal governance and decision-making issues. These instances might undermine investor trust or question the strategic insight of Travelzoo's leadership. Lastly, the substantial costs tied to customer acquisition and retention, exacerbated by limited content beyond deals, pose an operational challenge impacting profitability. This may suggest a requirement for a diversified or enriched content strategy to boost customer engagement and trim operating costs.

Conclusion

Overall, Travelzoo operates in an unpredictable online travel sector, balancing strategic innovation with market volatility. Still, it's venturing into the Metaverse via Travelzoo META, which aligns nicely with the growing consumer interest in immersive travel experiences. This move, along with its unique approach of combining advertising revenue with membership growth, strengthens its market position. Also, management's decision to initiate a share repurchase program reflects a positive outlook. This aligns with my "buy" based on my valuation model, suggesting a 27.7% upside potential for TZOO. However, the journey challenges and stiff competition demand a flexible and alert strategic approach. But, as a whole, I remain optimistic about TZOO at these levels.

For further details see: