2023-04-14 18:18:01 ET
Summary
- trivago N.V. sustained its rebound despite macroeconomic headwinds in 2022.
- Its solid financial positioning is still one of its cornerstones.
- The travel outlook this year remains promising as the market becomes more manageable.
- The trivago stock price remains at the bottom, which is consistent with consumer and investor confidence.
It's been quite a while since I last covered trivago N.V. (TRVG). Although travel and tourism saw an influx of demand, I was apprehensive about the company. We saw how inflation affected its overall performance. It remained viable and stable, but expenses were way higher than quarterly averages.
This year, the company may see mixed market conditions. I understand the pessimism of investors and analysts. Yet, I am more on the optimistic side. Its sustained revenue rebound and margin expansion in 4Q showed its effective strategy to cope with inflation. Even better, its stellar balance sheet proved it could cover its operating capacity and borrowings while withstanding headwinds. Meanwhile, the stock price remains divorced from the fundamentals.
The trivago N.V. downtrend appears logical, given the bleak consumer and investor confidence. Nevertheless, the evident undervaluation may open opportunities to purchase shares at a discounted price.
Company Performance
Travel and tourism suffered from pandemic disruptions for two years. Despite the sustained recovery, the market had a hard time bouncing back to pre-pandemic levels. In 2022, market potential was hampered by macroeconomic headwinds. I admit it was a mistake to underestimate inflation, especially its impact on fuel prices and airfares. Online platforms like trivago N.V. were not spared from the dramatic plunge. We must also account for the lawsuits and controversies it faced in 2020. Despite this, the company withstood these challenges and rebounded. Its resilience was highlighted in the second half of 2022 after inflation hammered revenues and margins.
Its operating revenue reached $562.28 million , a 32% year-over-year growth. Although it will have to push itself further to reach pre-pandemic levels, it was already an impressive rebound. It was only 59% of 2019 revenue, but it was about twice as much as that of 2020. Thanks to the easing of restrictions across regions as pandemic fears subsided. Economic recovery in 2021 also helped spur growth, given the sharp drop in unemployment.
But one of the biggest contributors was the peak of the digital revolution. As more businesses and jobs went online, more people were drawn to the internet. The same trend applied to online advertisers and booking platforms. In 2022, nearly half of the travelers used online booking and referred to advertisement websites. Increased convenience and efficiency were the primary reasons for going online. Meanwhile, being stuck at home for a long time, spending quality time with loved ones, change in environment, and relaxation drove travel demand.
Labor market transformation was another primary growth driver. The adoption of remote and hybrid work setups increased leisure and business travel. Also, it offered more flexibility for many entrepreneurs and employers to relax while managing a business or working. As of 2022, only 50% of survey respondents had remote work flexibility. Despite this, two-thirds of respondents had increased travel frequency due to more lenient work setups. It was not surprising that travel duration rose by about 20%. Likewise, its more strategic pricing helped it cope with inflation. It allowed more travelers to maximize their budgets.
Although inflation had a massive impact, the company was able to cushion its blow. Its qualified referrals reached 311.6 million versus 282.2 million in 2021. In 4Q, there was an 8% decrease in referrals, which we can attribute to inflation. In turn, the operating revenue was $106.99 million, a notable decrease from 3Q 2022. It was expected since prices were higher. Seasonality also played a vital role since 2Q and 3Q are peak seasons of travel. The good thing was that it was 5% higher than in 4Q 2021.
Relative to its peers, trivago appeared to underperform. Its market share decreased from 7.6% in my previous coverage to 5.7% in 4Q 2022. So, most of its peers like Tripadvisor ( TRIP ) and Webjet ( WEBJF ) had higher revenue growth. Even so, trivago remained a force to reckon with. Its efficiency was impeccable, given its well-managed costs and expenses. Its viability increased despite the rising price. Its operating margin was 16%, the highest in the historical data.
Indeed, trivago N.V. was most efficient last year despite the higher costs and expenses. Also, 4Q had the highest operating margin of 16.9% compared to the previous quarters. It was despite the lower number of referrals and demand due to seasonality and higher prices. The company succeeded in stabilizing revenue growth and margins.
This year, the company may see mixed market conditions due to recession fears. The Fed anticipates a mild recession in the first half. Meanwhile, its near-term performance may still be challenged, given the $44.7 million penalties from the 2020 lawsuit. It may lead to higher expenses and affect its reputation. Yet, trivago is still a market staple, given its deep ties with Expedia (EXPE). Its efficiency is essential in ensuring its viability.
It will also be easier for the company to manage costs and expenses, given the massive improvement in inflation. It is now only 5%, a 45% difference from the 2022 peak. The current inflation rate is the lowest in almost two years. It is also evident in gasoline prices per gallon which are only $3.535 versus the peak of $5.032. So while higher interest rates may attract savings, the lower cost of living may affect travel spending. Lower gasoline prices can help domestic travelers with cars and make airfares cheaper. These changes may help sustain travel hype, which may become more advantageous to the company.
Why trivago N.V. May Stay Afloat This Year
We already saw how trivago N.V. remained a solid and viable company amidst inflation. We also discussed the positive spillovers of decreasing inflation. In this section, we will focus on travelers' perspectives this year. Travelers may expect elevated fares and accommodation fees despite the relaxing inflation. We must understand that industries adjust to inflation at varying levels. Also, we are approaching Spring and Summer. Fortunately, lower inflation means more stable prices of necessities. It may increase the capacity of individuals to travel. A recent study adheres to it, given the substantial increase in international travel bookings for Spring. Also, many are traveling with their families. The multigenerational family vacation led to a 40% increase in adults traveling with families of at least three generations.
Moreover, the prevalence of hybrid work in the U.S. may increase the appeal of travel further. From employees, business owners are also geared toward this trend. A survey shows that 80% of entrepreneurs consider shifting to hybrid work setups. As such, more employees may have increased work flexibility and travel availability. All these factors may lead to increased travel spending. In fact, a recent study shows that 96% of Americans plan to travel this year. Among them, over 80% may spend the same or higher on travel. International travel may boom, given its increased online search traffic.
More importantly, trivago N.V. can sustain its operations and withstand more potential headwinds. Its solid financial positioning shows its adequate capacity. Its cash reserves are high and stable, comprising 42% of the total assets. Indeed, it is very liquid and more than enough to cover borrowings and share repurchases. Even if we disregard cash, its Net Debt/EBITDA is less than 1x. The company also enjoys high core earnings. It does not have to reduce cash or raise financial leverage to sustain its operating capacity. We can confirm it in the cash flow statement , since cash flow from operations exceeds CapEx. It may not be surprising, since trivago is not a capital-intensive company. Even so, the 11% FCF/Sales Ratio shows that the company remains prudent and efficient to turn revenues into free cash. These aspects can reveal the consistency between viability and sustainability.
Stock Price Assessment
The stock price of trivago N.V. has been plunging even before the pandemic. There was a slight rebound earlier this year, but the actual value remained below the average. At $1.44, it is 35% lower than last year's value. Despite the continued downtrend, investors may find opportunities to purchase shares at a discount. The P/B Ratio adheres to it, given the BVPS and P/B Ratio of 1.64 and 1.2x. If we use the current BVPS and average P/B Ratio of 1.36x, the target price will be $2.24. To assess the stock price better, we will use the discounted cash flow ("DCF") Model.
FCFF $50,200,000
Cash $313,690,000
Borrowings $48,310,000
Perpetual Growth Rate 4.8%
WACC 9.2%
Common Shares Outstanding 341,782,000
Stock Price $1.44
Derived Value $3.87.
The derived value also shows stock price undervaluation. There may be a 170% upside in the next 12-18 months. Investors may consider trivago N.V. stock at a cheap price.
Bottom Line
trivago N.V. maintains a sound performance with stable revenue growth and margins. It can withstand more headwinds while sustaining its capacity, given its solid financial positioning. Also, the stock price undervaluation is evident with enticing upside potential. The downtrend is evident, but it is still at its cheapest level. The recommendation is that trivago N.V. is a buy.
For further details see:
trivago: Stable Performance, Solid Fundamentals, Sluggish Stock Price