2023-11-21 04:14:59 ET
Summary
- trivago is a small player in the Online Travel Agency market with diminished liquid resources and high sensitivity to macroeconomic factors.
- TRVG operates as a search venue, helping users find accommodations and comparing prices from various booking sites, hotel chains, and individual hotels worldwide.
- Despite the risks, the stock is undervalued and has a 7.8% upside potential, making it a "buy" with a $3.02 price target.
trivago N.V. ( TRVG ) is a promising small player in the Online Travel Agency (OTA) market that recently distributed a hefty portion of its cash reserves. While the company is profitable, it’s undoubtedly risky due to its smaller size, diminished liquid resources, and high sensitivity to macroeconomic and geopolitical factors. Despite this, my valuation model suggests that TRVG looks like an undervalued stock even under conservative assumptions, implying a 7.8% upside potential from current levels. Hence, I rate TRVG a “buy” with a $3.02 price target.
Business Overview
trivago is a web and mobile platform that operates in the US, Germany, the United Kingdom, and worldwide. TRVG is a global OTA market player. TRVG is listed among the major companies operating in this sector, alongside other recognized names such as Booking.com (BKNG), Expedia Inc. (EXPE), Despegar (DESP), and TripAdvisor (TRIP), to name a few. The company is a search venue that helps users find accommodations like hotels, vacation rentals, and private apartments. It has access to 1.8 million hotels in over 190 countries and 55 localized websites and apps in 33 languages. TRVG compares prices from over 180 booking sites, 230 hotel chains, and 11,000 individual hotels worldwide, integrating over 175 million aggregated hotel ratings and 10 million written reviews to make finding the ideal hotel easier for users.
Interestingly, TRVG was founded in 2005 by three university friends and is based in Düsseldorf, Germany. It is a subsidiary of Expedia Lodging Partner Services Sarl. The company aims to become travelers' companions to experience the world, reshaping how tourists search for and compare accommodations. While this is a potentially promising business, the reality is that it’s highly dependent on the economy and largely undifferentiated at this time.
Analyzing TRVG’s Competitive Profile and Performance
It’s also worth mentioning that in TRVG’s last earnings call , executives outlined the strategy of the company to promote growth and market presence. The company is working to improve and update brand marketing, increasing the investment in this area in Q4 2023 to boost TRVG's image for price-conscious travelers. The process and user interface have been enhanced faster and with better image processing. Additionally, in this report, a leadership transition with a new CFO was announced.
TRVG is interconnected to macroeconomic cycles where financial conditions, consumer confidence, inflation, technological advancements, and government policies shape travel services' demand and, by extension, TRVG's financial performance. TRVG is affected by global travel trends, and the company must adapt to changing preferences. In 2023, rising costs due to inflation are influencing travelers' behaviors. Consumers focus on spending on essentials and limit their trips. Additionally, inflation has led to a more segmented market, with most consumers being more cautious about travel budgets . Due to budget cuts, trip duration tends to be shorter, even for businesses.
However, the global online travel agent market is forecast to grow significantly over the next decade. According to a recent report , the global Online Travel Agency (OTA) market size was valued at approximately $50.8 billion in 2022, and it is projected to grow at a CAGR of 11.07%, reaching about $95.4 billion by 2028. Despite macroeconomic conditions, the global online travel industry is expected to increase, driven by tech advancements such as the use of smart devices and access to high-speed connectivity and a shift to personalized experiences that require consultation with an online travel agent like TRVG.
Furthermore, TRVG announced that effective November 7, 2023, there will be a ratio change in the Company’s American Depositary Share (“ADS”) program to TRVG class A shares from one to five. Additionally, TRVG will deliver an extraordinary dividend of EUR 167,893,889 total and EUR 0.529228 per share for those holders as of record on November 3, 2023. The distribution payment on the ADS is anticipated to be made on November 13, 2023. The adjusting ADS ratio and the extraordinary dividend can increase the market price per share to appear more valuable to investors and positively influence market perception.
Valuation Perspective
From a valuation perspective, it’s worth considering that TRVG is a relatively simple company with a business model akin to being the “Google of travel accommodations.” This means TRVG’s business hinges on referral revenues and fees. Its service mainly connects potential travelers with different accommodation providers, just like Google connects people with whatever they are searching for. TRVG’s business is much more narrow and specific to the travel sector, making it a very niche. Yet its revenues are derived from clicks, which Google has already proven can be a fantastic cash-generating model. For context, TRVG’s revenues have consistently grown at a 3.9% CAGR since 2014, which isn’t particularly exciting. Moreover, these revenues have been highly volatile and sensitive to economic cycles.
On the other hand, the company’s COGS and operating expenses (OpEx) aren’t particularly complex. TRVG’s COGS are mainly hosting and technology infrastructure, producing the actual listings on its searches, keeping them updated, and processing fees. On the OpEx side, TRVG has R&D, SG&A, and marketing costs, which I believe are self-explanatory. Indeed, it’s not a complicated business model, with mostly variable OpEx and fixed COGS. The result has been volatile revenues and improving EBIT margins since 2014, with the notable exception of the COVID pandemic period in 2020.
Today, TRVG can sustain EBIT margins of roughly 10% and long-term revenue growth of at least 3.9%. Notably, the latest special dividend did subtract a substantial portion of its cash reserves and suggests the company doesn’t see meaningful opportunities to invest in the business, which is why it returns cash to shareholders. Nevertheless, it’s also important to consider that the OTA sector is expected to grow at an 11.07% CAGR until 2028, higher than TRVG’s historical revenue CAGR. While this could be concerning, I think it makes it a relatively conservative assumption to project a terminal revenue growth rate for TRVG of just 3.9%, well below the industry’s CAGR.
As shown in the model above, I’ve assumed the latest D&A, CAPEX, and NOWC margins. Also, I used the company’s historical average tax rate of about 29.6%, coupled with declining EBIT margins down to 10.0%. Finally, my revenue growth assumptions also tap into TRVG’s historical revenue CAGR. I believe these are relatively conservative inputs, yet TRVG appears to be undervalued despite that. My model indicates a 7.8% upside potential from current levels, with an implied price target per share of $3.02. Hence, TRVG’s compelling valuation proposition, promising technology, and Google-like business make it a decent “buy” at the current levels.
Risks to the Investment Thesis
Even though the valuation assessment and its business appear compelling, it’s worth remembering that TRVG has risks. In particular, I think the OTA market is undoubtedly highly competitive, and there are many relatively undifferentiated competitors in the space, such as Bookings, Expedia, and Despegar, to name a few. This lack of product differentiation can cap the company’s potential profit margins and lead to pricing pressures under more pessimistic scenarios. Given that my valuation model just implies a 7.8% upside potential, these factors could derail the investment thesis and make the “buy” rating turn into a “hold” or potentially even worse.
Moreover, it’s worth mentioning that TRVG’s prospects are also largely contingent on macroeconomic factors that are largely outside the company's control. It’s also inherently dependent on the travel industry’s health, making TRVG susceptible to geopolitics and macroeconomic risks. Lastly, TRVG is, at its core, a small technology player, and by definition, it makes it easy to be disrupted by potentially new business models. Given that it recently distributed a substantial portion of its cash, its ability to pivot and have a sizeable cash runway, or even resources for strategic M&A, is also substantially limited.
Conclusion
Overall, TRVG is an interesting business with a solid business model that can deliver compelling cash year after year. Unfortunately, TRVG’s business is inextricably linked to macroeconomic factors and cycles, which raises its risk profile as a potential investment. Nevertheless, such a risk profile is likely already incorporated into its seemingly high Beta and CAPM of 1.71 and 13.0%, respectively. Also, in my valuation model, I believe I made conservative assumptions. Yet despite these factors, TRVG emerges as an undervalued stock, which leads me to think it’s a decent “buy” at these levels, with a price target of $3.02 per share.
For further details see:
Why trivago Is A Decent Buy In The Online Travel Market Despite Risks