2023-06-07 14:41:58 ET
Summary
- Trivago is a profitable and cash-generative business, with a promising future ahead and a large cash balance.
- The business is hugely undervalued, trading at less than 3.1x 2023 EV/EBITDA, significantly below peer valuations.
- Share buybacks look likely in the near future, which should act as a catalyst to make the market take another look at this business.
Investment Thesis
Trivago ( TRVG ) is trading at a rock-bottom valuation, less than 3.1x forward EV/EBITDA which is way below peers and just objectively cheap. A large volume of recent insider selling has kept the price suppressed, but the future looks bright with growth and potential share buybacks on the horizon. What's more, this business is already profitable and cash generative and comes with a significant cash cushion limiting the downside risk.
Business Overview
Trivago is a global hotel and accommodation price comparison business which offers access to over 5m hotels and other holiday rentals through its website trivago.com. Revenue is generated via advertising whereby a hotel owner or booking agent will pay to be shown higher in consumer searches, on a cost-per-click basis, or as a commission on any sale made. Trivago does not offer a booking platform, rather it redirects consumers to third-party websites to complete their booking.
Trivago is headquartered in Germany and uses the euro as its primary currency. The shares are traded on the Nasdaq under the ticker TRVG. I will be working in euros throughout this article unless otherwise stated.
The travel sector was obviously hit hard by Covid but has since seen a decent rebound, with a lot of pent-up demand being realised. That said, Trivago's revenue is still a way off pre-covid levels. This is partly because Trivago's advertising spending (TV commercials etc.) was drastically cut in 2020, and has remained at a much-reduced level since. As advertising is the main avenue for customer acquisition, this has caused a ripple effect on the top line.
Additionally, management has been focusing on increasing efficiency and profitability, instead of just revenue growth. A key measure used to determine spending efficiency is the return on advertising spend (ROAS), which is calculated as total revenue from referrals (i.e., fees paid to Trivago by advertisers when a user gets redirected to the advertiser's website) divided by advertising spend. This has steadily been increasing over the past five years, despite the bumpy topline story.
Profitability has increased over the last year, for a number of reasons. There has been a reduction in staff numbers and reduced office space as part of cost-cutting measures, but expensive TV advertising has also been temporarily scaled down. However, advertising is in the process of being ramped back up, so can probably expect a bit of pressure on margins going forward. It's unclear when/where margins will eventually normalise, but Trivago has turned a profit over the last four years (with the exception of 2020 for obvious reasons) as management's approach has turned from growth at any cost, to realising profitability.
In their Q1 shareholder letter , management guided for FY-23 Adj. EBITDA to be in excess of €70m, €18.6m of which has already been realised in Q1, with a similar amount expected in Q2. TTM free cash flow is €54m. Capex requirements for this business are minimal, as such one expects to see good cash generation with little investment required to run this asset-light business. I would expect free cash flow to drop a bit for the full year, but ultimately come in at €40-50m.
Shareholders and Insider Selling
There actually isn't much of the stock available to buy. According to their 2022 annual report , online travel business Expedia Group ( EXPE ) owns 61.2% of share capital, and 84.3% of voting rights, the founders own 15.7% of share capital and ~13% of voting power, meaning ~77% of total share capital is owned by founders and Expedia, along with ~96% of voting rights. Add in PAR investment partners' 6.2% stake (which is estimated to be at a purchase price of >$4 per share ) and the 3% owned by management, there's actually only about 14% of the share capital available on the market. That's only about $60m in purchasable shares. This of course means that other shareholders are in the definite minority, however, the large insider ownership gives me confidence that management's interests are somewhat aligned with shareholders.
Part of the reason for the low share price, particularly in the last few weeks, is a large amount of insider selling . Matthias Tillmann, CFO since 2020, has been selling blocks of shares on the open market throughout the last half of May. He has sold ~592 thousand shares for an average price of about $1.20 per share, selling about 20% of the daily volume every day for the two weeks of May. This will definitely have had a suppressive effect on the price.
For reference, as of December 2022, he owned ~1.4m shares, but it seems that all the shares he has been selling throughout May have been acquired through stock options and immediately sold, so I would expect his current stake to be roughly in line with that in December.
Further, former CEO Axel Hefer holds nearly 8m shares, it is unclear what exactly he intends to do with these now that he is no longer with the company as of 9th May 2023. On 1st June 2023, he sold 53 thousand shares in the open market, c. 20% of the volume for that day, similar to the pattern of selling from Matthias Tillmann. Given the large number of shares held by Axel Hefer and his recent departure from the company, I would expect his selling to continue for at least a few weeks at similar levels, keeping the downward pressure on the stock price.
In my opinion, this insider selling ultimately doesn't affect the fundamentals. Management and founders still hold very large stakes in the business, and I expect will continue to do so. If anything, large sales on the market provide a good buying opportunity for the steady-handed investor. I wouldn't expect PAR partners to liquidate their position at this level either as they would take a huge loss, and the stock seems undervalued at current levels by almost any means.
On that note, an item on the agenda for the AGM on June-30th is a vote for the company to authorise a share buyback, up to 10% of the company's issued share capital (34m shares). Recalling that the vast majority of voting power is held by management and Expedia, I should expect this to pass. Given the large cash balance, and management's clear refusal to issue a dividend, I might expect to see share buybacks starting in the second half of the year. Historically, Trivago has opportunistically repurchased shares from the founders. In 2022 they purchased 20m shares in a block transaction from co-founder Peter Vinnemeier for €19.6m ($1 per share), so they have history here. Perhaps there might be another block purchase from an insider, maybe former CEO Axel Hefer who owns nearly 8m shares, or purchases on the open market which could give us some upward momentum in the stock price. In any case, I believe this to be a major catalyst.
Risks
A major risk, in my opinion, is their high revenue concentration. Booking Holdings ( BKNG ) (Owner of Booking.com among others) and Expedia combined account for 43% and 34% of Trivago's revenue respectively. While the relative amounts from these two have been decreasing, this is still definitely a material risk. Given that Expedia owns such a large stake in Trivago, I expect their revenue to be relatively safe. However, Trivago is definitely susceptible to the whims of Booking Holdings' advertising budget. Management has clearly identified this risk and has made progress in lowering the percentage from these two. The relationship with Booking Holdings seems to be good, and there is no reason to expect anything to happen here. Still, it is something to be aware of.
This business faces legal and regulatory risks. In 2018, the Australian Competition and Consumer Commission (ACCC) filed a lawsuit alleging that Trivago misled consumers with its hotel price comparisons by favouring advertisers who paid the highest fees, rather than the best deal. Trivago lost the case and was ordered to pay a penalty of €29.6m in the second quarter of 2022. There are further cases pending in Israel and Canada. While Trivago doesn't seem to be really doing anything vastly different from any of its competitors, there is clearly some risk here.
In a more general sense, with fears of a recession looming, inflation still running high across the globe, and war in Europe, it is not a great time to be operating a travel business. That said, Trivago performed remarkably well last year, despite high inflation and cost of living crises in its target markets. I actually think in such a poor macroeconomic environment, a price comparison site is positioned relatively well as people seek to get the most value for money on their holidays.
Latest Results
On 3rd May 2023, Trivago released its Q1 results . Revenues increased 9% YoY to €111m, while adjusted EBITDA dropped 12% to €18.6m for the quarter, mainly due to higher advertising expenses. ROAS for the quarter was 168.2%, down from 183.9% in the same period last year again due to increased spending. Management are guiding for an overall lower ROAS for the full year as advertising spending is ramped up. The market reacted poorly to the Q1 release, with shares down 15% after results were released, presumably due to fears of margin compression, and the realisation that the bumper profits seen in 2022 would likely not be repeated to the same level this year. I think this is somewhat of an overreaction, Q1 results seemed solid in my opinion.
On 9th May 2023, Trivago CEO since 2016 Axel Hefer chose not to renew his contract and stepped down with immediate effect. He was replaced by Johannes Thomas who started at Trivago as an intern and worked his way up to chief revenue officer before leaving the company in 2020. He has a good knowledge of the business, having already worked for Trivago for over 9 years. Additionally, Trivago founder and holder of 50m shares Rolf Schrömgens will be rejoining the company as an advisor and member of the supervisory board. CFO Matthias Tillmann had his contract up for renewal at the same time and has remained with Trivago.
Valuation
The company has a rock-solid balance sheet with cash and short-term investments of €297m (€257m cash) as of Q1 which has been accumulating nicely over the last few years. Bear in mind this business has total liabilities of €123m, mainly in the form of operating leases (€40m), deferred taxes (€29m) and accounts payable (€20m). Netting out the total liabilities leaves us with net cash and short-term investments of €174m. That's over a market capitalisation of €390m, giving us an enterprise value of about €216m.
Trivago is therefore trading at a ludicrously cheap valuation, <3.1x FY23 EV/EBITDA, 4-5x FY23 FCF, which is crazy in my opinion. Looking at the valuations of similar companies, Expedia 12x EV/EBITDA , Booking Holdings at 17x and an average of ~10x across the consumer discretionary sector according to Seeking Alpha, there is a clear discrepancy. Expedia and Booking Holdings are both much bigger businesses and admittedly are more profitable so one would expect Trivago to trade at some discount, but the current discount is way too extreme in my opinion.
What's more, An investment in Trivago comes with significant downside protection. For your $1.20 share, you get ~$0.54 net cash and ~$0.78 tangible book value, this is, of course, excluding the value of the brand and website, which saw over 310m unique visits in 2022 (that's 850,000 a day). Adding on the top expected EBITDA of $0.22 / FCF of $0.13-0.16 in this year alone should leave you in a very comfortable position.
It's not the best business in the world, but it generates cash and is incredibly cheap. On top of that, Trivago has actually seen meaningful growth despite the harsh environment. While there are definitely risks involved here, I believe that the rock bottom valuation provides enough potential reward to offset these, whilst providing a very attractive deep value proposition. Share buybacks and a few more quarters of growth, or even sustained revenues will trigger the market to take another look at this stock. The sheer value itself is a catalyst for this stock.
For further details see:
trivago: A Profitable Business Trading At A Ridiculously Low Valuation