TZOO - Travelzoo: Recent Selloff Offers A Buy The Dip Opportunity

2023-08-24 07:40:42 ET

Summary

• Travelzoo is having a strong year with solid growth and climbing profitability.
• The company is benefiting from momentum in its European segment and the "Jack's Flight Club" business.
• We are bullish on TZOO stock which appears undervalued with the current price level representing a compelling buying opportunity.

Travelzoo ( TZOO ) is recognized as a pioneer in online travel and entertainment publications since its founding back in 1998. While the company's profile has been overshadowed by the mega travel agencies over the past decade, the latest quarterly results send a clear message that the business is alive and well.

TZOO is generating solid growth and climbing profitability, counting on more than 30 million members worldwide attracted to its exclusive deals and travel offers. We like the stock given its combination of solid fundamentals and growth tailwinds making it a unique micro-cap in the market.

While the shares are up about 55% this year, we note the more recent correction as shares are down more than 30% from its Q2 highs. In our view, the current level offers an attractive entry point for a stock that is well-positioned to rebound higher.

TZOO Key Financial Metrics

TZOO reported its Q2 earnings on July 27th with a GAAP EPS of $0.17, more than doubling from $0.08 in the period last year. Revenue of $21.1 million climbed by 19% year-over-year.

The story this quarter was the continued income ramp as the operating margin of 15% firming from 10% in Q2 2022. This was achieved through two key factors. First, there were some good cost-cutting efforts as general and administrative expenses fell by 10% y/y. Secondly, a shift in the sales mix tilted toward higher-value services across the core advertising and bookings commissions-based business model also added to the top line.

While the larger North American business segment posted 14% revenue growth, Europe has been a bright spot for Travelzoo with a stronger 35% increase.

This is important because the path is for the European side to contribute to positive operating income going forward considering it just approached breakeven in Q2. Management explains this quarter is seasonally softer and the expectation is for even higher margins into the second half of the year.

Within the results, there is also Travelzoo's "Jack's Flight Club", a subscription service which is a separate members-only community offering alerts on the best deals. Revenue increased by 15% year-over-year, crossing the $1 million quarterly mark for the first time.

With the number of paying Jack's Club subscribers up 30% year over year, the understanding is that the new cohort of members will drive a growth runway that will extend over the next several quarters.

Finally, we can bring up that the company ended the quarter with $19.5 million in cash against $4.4 million in long-term financial debt. We view the balance sheet and underlying level of cash flow as strong points in the company's investment profile.

Notably, Travelzoo has been active with share buybacks, repurchasing $4.7 million of stock in Q2. This quarter, the board of directors approved a new 1 million repurchasing authorization representing approximately 6% of the current 15.4 million shares outstanding.

What's Next For TZOO?

Overall the takeaway for us when looking at Travelzoo is the impressive level of strategy execution. The media portal has managed to remain relevant despite the shifting environment in recent years of both online travel and advertising.

The post-pandemic global travel rebound has helped with operating momentum, but the sense is that the company is in a better position now than its outlook from levels in 2019.

The steps at diversification into new categories of deals beyond flights and hotels appear to be working to keep members engaged. The Jack's Flight Club service which crosses over into a social media component appears to be resonating as the type of direction that will support long-term growth.

The company is also pushing forward with a " metaverse " initiative offering users a sort of virtual travel experience. While the experimental project is currently just a small part of the total business, it highlights a push toward innovation that will be important to the long-term outlook.

A recent survey shows that the majority of Travelzoo members are active travelers and within a demographic that values new ideas. The bullish case for the stock is that these members remain loyal incremental to Travelzoo's ability to bring in new users on board as part of the broader growth opportunity.

According to consensus estimates, the company is expected to reach $83 million in revenue this year, up 17% from 2022, and grow again next year by 12%. On the earnings side, EPS is forecast to hit $0.80 for the full year 2023 and then climb again by 14% to $0.91 in 2024. We believe these estimates are well within reach.

In terms of valuation, TZOO trading at a forward P/E of 9x appears undervalued in our opinion and sizes up well next to larger global travel and leisure stocks, like Expedia Group ( EXPE ) trading at 11x or even Tripadvisor ( TRIP ) at 15x.

While Travelzoo's "deals" model shares some similarities to Groupon ( GRPN ), the stock does not even register on this chart as the company is not currently profitable. Overall we believe TZOO deserves a bit higher valuation premium given its growth and earnings momentum.

TZOO Stock Price Forecast

The reason Travelzoo came to our attention is the recent share price weakness, selling off since hitting a high near $11.00 in early June. While the macro backdrop defined by mixed economic indicators has worked to dampen the enthusiasm for consumer spending and leisure, our take is that the reset lower in TZOO to under $7.00 is overextended and unjustified. By this measure, we believe the next big move in the stock will be higher and the current setup offers a good trade opportunity.

Final Thoughts

We rate TZOO as a buy with a price target for the year ahead at $10.00, representing a forward P/E of 12x on the current consensus 2023 EPS. The way we see it playing out is that the global economy will remain resilient allowing Travelzoo to continue executing its growth strategy.

The main risk to consider is that despite all the positives we've covered, readers should be aware that with a current market cap of just $100 million, the understanding is that shares of TZOO are prone to wide swings of volatility.

We think the risk-adjusted outlook is worth it, although the downside here could be significant in a scenario where results underperform and TZOO earnings suffer. Monitoring points over the next few quarters include the operating margin as a key financial metric along with the level of active members reflecting the brand health.

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