TZOO - Travelzoo: Benefitting From Normalizing Travel Demand

2024-01-17 06:04:53 ET

Summary

• Travelzoo shows consistent financial growth and profit margin improvement.
• It is actively investing in virtual travel and growing its high-margin subscription models.
• Despite challenges, Travelzoo's undervalued stock and positive market conditions make it an attractive choice for investors.

As the travel industry normalises after last year's surge and prices remain at an all-time high, Travelzoo's (TZOO) service of sourcing exceptional deals has become increasingly attractive in the current climate, catering to both demand and supply sides. Despite not yet returning to pre-pandemic levels, the company has been steadily increasing its top line, bottom line, and membership count. A notable post-pandemic strength is the improved gross profit margin attributed to strategic changes in the Asia Pacific Segment. The company's relatively low and stable costs suggest that any increase in the top line could significantly boost the bottom line. Looking ahead, Travelzoo anticipates YoY revenue growth for the upcoming quarter. Furthermore, the company has begun investing in the multi-billion dollar industry of virtual travel. While the company's negative levered free cash flow may warrant caution, the overall outlook for Travelzoo is optimistic. Therefore, investors may want to take a bullish stance on this stock.

Company overview

Established in 1998 in New York, Travelzoo is an internet media company that curates travel, entertainment, and local deals from various businesses, travel organisations, and entertainment companies worldwide. With a user base of 31.2 million, 7.5 million mobile app users, and 4.1 million social media followers, Travelzoo caters to a customer base that is affluent, active, and open to new experiences.

The company's objective is to beat pre-pandemic membership numbers and top-line growth. We can see in Q3 2023 that the company has increased top-line growth across all of its segments and categories over the last nine months, not including Travelzoo local, due to the decrease in local deal vouchers sold.

It plans to achieve this by increasing the value of a Travelzoo membership through exclusive benefits and aiming to increase EPS through higher operating margins. One such strategy has been the expansion of Jack's Flight Club, the high gross margin subscription model at $49 per year, available across many of its segments, although yet to be introduced across all regions of North America.

In the long term, Travelzoo is investing in developing Travelzoo Meta, a virtual travel platform currently under development and intended for founding members, those willing to pay a $20 membership fee and metaverse content creators. The virtual tourism market, valued at $6.1 billion in 2022 , is projected to grow at a CAGR of 30.2%, reaching an impressive $23.5 billion by 2028. This positions Travelzoo at the forefront of a rapidly expanding industry, making it a compelling prospect for potential investors.

Financials

While the company has yet to return to its pre-COVID financials, there has been a steady upward trend in the top line over the past three fiscal years. The three-year revenue CAGR stands at 7.24%.

The company has surpassed EPS estimates in two of the last three quarters and is projected to increase EPS by 52.11% to reach $0.85, resulting in a forward price-to-earnings (P/E) ratio of 10.92.

The company boasts a generous gross profit margin of 86.67%, an improvement from the pre-pandemic period, which was affected by losses from its Asia Pacific business. This segment has since transitioned into a licensing business, improving margins.

The company's cash from operations was $7.02 million on a TTM basis, an upward trend over the last three years.

However, the levered free cash flow is negative at $923.88k, which could be a concern for investors as it could limit the company's ability to pay off debts, reinvest in the business, and provide returns to investors. The company has made most of its vouchers non-refundable, with members allowed to request refunds within the first two weeks. This policy should continue to reduce merchant payables. Furthermore, we are seeing a YoY improvement, nearing positive cash generation.

The company's cash, cash equivalents, and restricted cash amounted to $16.60 million, a YoY decline of $4 million. The company's debt stands at $9.71 million. The company also repurchased 1 million shares in Q3 2023. The current ratio, which indicates the company's ability to cover its liabilities, is at 0.78, potentially raising concerns for investors.

Valuation

Travelzoo's forward P/E ratio stands at 10.92, which is not only below the median of 16.08 for the communication sector but also significantly lower than the company's five-year average of 22.43. This could suggest that the stock is currently undervalued. Over the past year, the company has outperformed the S&P Index in every quarter. However, a ten-year retrospective reveals a loss of 59.17% in value for the company, while the S&P 500 has yielded a return of 213.99%. The company has indicated YoY EPS growth for its upcoming quarter. Furthermore, the market is more favourable as prices are higher and consumers seek better deals. On the supply side, the company benefits as companies compete for customers, putting Travelzoo in a better position to negotiate prices. Therefore, it appears that the company is in a good position to increase its financials while maintaining low costs.

Risks

Undoubtedly, investing in this stock comes with its share of risks. The travel industry is inherently seasonal. Travelzoo's previous quarter, typically a lower-performing period, is a testament to this. Such fluctuations are expected and can adversely affect the company's overall growth trajectory. Being in the travel business, Travelzoo is also susceptible to travel advisories issued by governments. Furthermore, the company's negative levered free cash flow is a concern, as it indicates a reliance on external funding sources for reinvestment and debt repayment. However, we have seen that this is improving. Lastly, a significant shareholder, Azzurro Capital, sold 155,000 shares in November. While this action doesn't inherently signal a problem, it could potentially depress the stock's value due to a sudden surge in supply, or the news could negatively impact market sentiment.

Final thoughts

Travelzoo has seen upward trending financials, impressive increase in stock price over the last year and has indicated growth in the near term. It's well positioned to source travel deals across the globe and is investing in the exciting virtual travel market. However, investors should be mindful of the negative levered free cash flow. All in all, Travelzoo's future looks promising, making it an interesting consideration for potential investors. Therefore, investors may want to take a bullish stance on this stock.

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