2023-03-24 09:12:06 ET
Summary
- Consumers are starting to think in terms of getting lower-cost travel and lodging, which should put downward pressure on the performance of the company.
- Management believes changing consumer behavior isn't going to hurt the outlook for 2023, but I think they're wrong based upon macroeconomic impacts that could get worse.
- An increase in investment for revenue growth, along with consumers looking for deals, suggests the bottom line is going to be under pressure in 2023.
The share price of trivago ( TRVG ) has fallen off the cliff since July 2017, when it was trading at approximately $24.00 per share, and plunging from there to its recent 52-week low of $0.93 per share.
It has bounced from there to trade at about $1.50 per share as I write, and based upon its latest earnings report, management commentary, uncertainty in the job market, and the impact of the actions of the Federal Reserve, it looks like it could be a tough year for TRVG, as consumer behavior is starting to change as they start to look for lower-cost bargains.
The company plans on increasing spending on revenue growth, which will put downward pressure on margins and earnings.
In this article we'll look at its latest numbers, how management sees the next year or so, and the macroeconomic headwinds that are likely to result in a disappointing underperformance in 2023, especially on the bottom line.
Some of the numbers
Revenue in the fourth quarter of 2022 was €104.9 million, compared to revenue of €89.1 million in the fourth quarter of 2021, a gain of 18 percent. Full year 2022 revenue was €535.00 million, compared to full year 2021 revenue of €361.4 million, up 48 percent year-over-year.
The increase in revenue was primarily attributed to a boost in the average daily hotel rates. That was also reflected in the boost in the company's revenue-per-qualified-referral (RPQR) compared to last year.
Although these numbers are decent, it should be understood that the comps as measured against last year were favorable to the company because of corporate travel restrictions being in place. The favorable comps will continue in the first quarter of 2023, according to management.
Adjusted EBITDA in the fourth quarter of 2022 was €22.6 million, compared to adjusted EBITDA of €19.6 million in the fourth quarter of 2021, up 15 percent.
Net income in the reporting period was €10.4 million, compared to net income of €15.2 million for the fourth quarter of 2021, down 32 percent year-over-year. Net loss for full year 2022 was -€ (127.2) million, compared to net income of €10.7 million for full year 2021.
At the end of calendar 2022 the company had cash, cash equivalents, and short-term investments of €293.9 million, compared to €256.4 million at the end of calendar 2021. The company is debt-free.
Consumer behavior starting to change
There has been a lot of pent-up demand for travel over the last year or so, with people seeking out experiences after being locked down for so long. That now appears to be changing.
Management said it's starting to see consumers starting to look more for lower-cost deals, such as staying for shorter periods of time, low-cost destinations, and growing number of clicks on lower price offers from hotels.
Even though the company said it doesn't think those trends will change the overall picture, I think it's in the early stages of a change in consumer behavior that'll result in declining revenue and earnings because of the actions of the Federal Reserve, prolonged higher interest rates, and uncertainty in some part of the job market, such as in the tech sector.
My conclusion is that this isn't just a temporary situation, but one that is likely to get worse as we get deeper into 2023. If that's how it plays out, it's going to get tougher for TRVG as the year goes on, and probably into early 2024.
EBITDA margin should drop in 2023
CFO Matthias Tillmann said the EBITDA margin goal of a minimum of 20 percent was achieved in 2022. Yet, it looks like the company is not going to attempt to defend that level over the next year or so, saying growing its post-pandemic revenue baseline is more important at this time than hitting 2019 pre-pandemic revenue levels, by which he meant targeting "high-quality and repeat traffic."
Tillmann said that with the benefit of hindsight the company could have invested more than it did in 2022 in order to profitably accelerate growth and is ready and willing to do that in 2023 even if it's at the expense of short-term margins.
With that in mind, the company is going to boost investments during 2023, although he doesn't see EBITDA margin fall below the 10 percent level it was at in 2019.
The point he's making here is he feels the company would have performed better if it had invested more in 2022, even if there was temporary pressure on the bottom line of the company.
Taking that into consideration, it looks like profitability is going to remain an issue for TRVG going forward, and if the traveling and lodging market does contract in 2023, like I believe it's going to, margin is probably going to be under further pressure as consumers look for low-cost, lower margin deals that, when combined with increased investment, could result in a surprise on the downside.
To get an idea of how the company measures against the sector median in profitability, its weaknesses include EBITDA margin, net income margin, return on assets, cash from operations, and return on equity.
Based upon management commentary, this isn't likely to improve at all in 2023, and is probably going to get worse.
Conclusion
I don't believe TRVG is going to be able to avoid the effects of an economic slowdown in 2023, which is probably going to get worse as the year goes on.
If that's how it plays out, it means consumers are going to continue to look for low-cost deals, or abandon traveling altogether in large numbers, which would be a significant headwind over the next year.
Combined with additional spend and changing consumer behavior, its profitability metrics and the bottom line are probably going to underperform in 2023. I don't see consumers returning to an optimistic outlook in regard to spending on travel and lodging in the months ahead, as there aren't any major catalysts I can see that would result in increasing their spending on traveling in the pursuit of experiences, as they did in 2022.
If the company is able to modestly increase revenue by increasing spend, it's going to come at the expense of margin and earnings. Taken together with macroeconomic headwinds, I think TRVG is going to struggle more in 2023 than management thinks.
Just because it's trading low doesn't mean it can't go lower, and I tend to think that's how it's going to play out going forward.
For further details see:
trivago: Signs Things Are Slowing Down