2023-04-24 05:02:23 ET
Summary
- trivago N.V. is a company that operates a hotel and accommodation search platform worldwide.
- Revenues have grown on the back of greater digital holidaymaking.
- TRVG's margins are an issue as they have always been low. It is unclear where they will normalize.
- Growth is good, despite the risk of short-term headwinds.
- trivago is very cheap at 2x NTM EBITDA.
Company description
trivago N.V. ( TRVG ) is a company that operates a hotel and accommodation search platform worldwide. The company offers an online meta-search for hotels and accommodations through different online travel agencies, hotel chains, and independent hotels. It also provides travel search for various types of accommodations and advertiser access through its website and apps.
Share price
trivago's share price has performed extremely poorly in the last 6 years, losing the majority of its value. The initial rise was driven by rapid growth but the inability to translate this to accretive gains has been problematic, with losses following suit.
Financial analysis
Trivago Financial performance (Tikr Terminal)
Presented above is trivago's financial performance for the last 9 years.
Revenue
Revenue has grown at a healthy rate of 7%, however, this masks the story within. Firstly, the business struggled with growth before Covid-19, with a decline in both FY18 and FY19. This was driven by a reduction in referral income, which means reduced usage of their services. The pandemic was of course a disaster for the business, experiencing a further 70% decline in sales, as travel ground to a halt. Revenue growth has bounced back well but remains around 50% of FY17.
We will now discuss key revenue drivers to assess where trivago is and how revenue should develop over the coming years.
With the growing digitization of society, we are increasingly seeing people turning to online travel booking platforms to plan and book their trips. This is a logical step as it is far more convenient and means consumers do not need to interact with travel agents, making the experience far more casual. According to a report by Future Market Insight, the global online travel market is expected to grow at a CAGR of 11.5% from 2022 to 2026. This trend is likely to benefit trivago, as greater online traffic moves toward the site. Given how easy its website is to use, it is a no-brainer for consumers to check multiple sites. Although we refer to this as a trend, our view is that this is a structural shift in the industry, and will only head in one direction.
While traditional hotels remain the most popular form of accommodation, alternative options such as vacation rentals, homestays, and serviced apartments are gaining popularity. Companies like Airbnb ( ABNB ) have exploited this, with many others following. trivago has already started to incorporate alternative accommodation options into its platform but has been unable to gain traction. This is an issue as it is a key growth area, with trivago currently operating in the high-competition segment (traditional hotels).
The online travel agency industry has seen a significant amount of consolidation in recent years, with large players like Expedia ( EXPE ) and Booking Holdings ( BKNG ) acquiring smaller competitors. This has worked against trivago as although the business is a consolidator of options, trivago has struggled to compete, losing share of traffic since FY17. The following two graphs illustrate this perfectly.
Market share (Trivago) Market share (Trivago)
Economic conditions pose a short-term risk to the business. During such inflationary times, consumers are far more likely to act defensively, deferring and reducing social spending, such as holidays. This is because their cost of living is rising rapidly, reducing savings and pressuring finances. Our view is that things will continue for the next 12 months or so as rates are used to bring inflation under control. This could mean tough times for trivago as revenue begins to soften. It should be noted, however, that the business has yet to feel the impact of this, suggesting some level of resilience.
Margins
We now move on to the next issue for trivago, that being margins. The business has struggled with achieving EBITDA and NI positivity. In the most recent year, the company has managed 12%, which in our view is pretty unattractive. The reason for this is the degree of marketing spend required to drive consumer traffic, with S&A expenses representing 75% of revenue. It is clear to us that the company's brand is far less valuable than Booking's, which has an EBITDA margin of 31%. This makes it difficult for investors as the business has not shown a normalized profitability level and so there is a real risk that margins contract once the market begins to soften. Further, even if current levels are maintained, they are still far below the market leader.
The good news is that if they can achieve sustainable profitability, this should mostly translate to cash, given the simple nature of the business model.
Balance sheet
trivago's balance sheet is in fairly good shape, with the business utilizing very little debt and accumulating cash. The company has generally been cash positive from operations and so there is no real solvency risk or cash drain, which should mean the business is flexible to strategic direction, such as M&A activity.
trivago is currently trading with a market cap of EUR 476M, which is only marginally above its net asset level when adjusted for intangibles (EUR 290M). This does represent an opportunity as with the company generating cash, the business should be accretive.
Outlook
Trivago outlook (TIkr Terminal)
Presented above is Wall Street's consensus view on how the next 5 years will play out.
Revenue is forecast to grow at a similar rate to what was historically achieved, reflecting fundamental improvements in the industry as a greater share of travel is booked online.
Margins are also expected to improve, with analysts likely banking on volume driving greater incremental gains through referrals. Essentially the marginal cost of providing the service is very low and so the bigger the company gets, the greater the profits it can generate.
Our view is that the growth looks reasonable given the general tailwinds in the online segment but the margin expansion does not look evidenced so far. Q4 EBITDA-M was only 1% higher than the full year, suggesting the business is not substantially improving Q/Q.
Peer analysis
Profitability (Seeking Alpha)
Presented above is a comparison of trivago to the "Communications Services" sector on a profitability basis.
The business performs poorly on a profitability basis, as its EBITDA margin is 5.6% below the average and it is still loss-making. This supports our view that the business is just not very attractive profitability-wise. Even if margins improve, they are not forecast to beat the average.
Growth (Seeking Alpha)
As a growth business, this is trivago's area to shine, and it does. The business is improving across all metrics far above its peers. What is important to see is that EBITDA and EPS growth exceeds revenue, which means the business is expected to become more profitable over time.
Valuation
trivago is currently trading at an amazingly low valuation. On a forward basis, the business is at 2x EBITDA, and only 7.6x earnings. Markets are seemingly pricing in a capitulation in margins or growth, as 2x EBITDA is reserved for a credit event. Although we do not see this on a growth basis, it is possible that margins do contract. Nevertheless, the company is generating cash so it is not like investor money is being burned. This is a bizarre valuation.
Final thoughts
trivago is operating in a segment on the up, with growth expected long term. The business may face headwinds in the short term but we do not see this having a substantial impact before it subsidies. Our only real issue with the business is its margins, they are not attractive enough and do not currently give us confidence in their sustainability. Markets are pricing the business as if failure is possible and losses are certain. This does not look to be the case, yes they may be loss-making on an accounting basis but on a cash basis the company is fine. For speculators, this could be a shrewd buy but for longer-term players, we believe in waiting until there is better visibility on margins.
For further details see:
trivago: Speculative Stock With Margin Uncertainty