Travelzoo Preannounces Q3 Results

October 15, 2012 at 4:27 am Leave a comment

Travelzoo pre-announced revenues and earnings that were below the range most investors were expecting for Q3,causing the stock to fall 15% below it closing price on Thursday. Travelzoo CEO Chris Loughlin said the company remained positive about its long term growth strategy and gave strong indication that Travelzoo would be moving much more heavily into the hotel booking side of the business, by either developing or acquiring a hotel booking engine. He also mentioned that the company was in in negotiations to acquire a hotel booking website. We view this as an extremely positive development, given that the core earnings growth of all the major players in the online travel space have been impacted heavily by their ability to take hotel reservation market share. I can remember when Priceline’s stock cratered and was left for dead, even though the company had tremendous name recognition,technology assets and tens of millions in travel booking revenue. However, that revenue was mostly generated by very low margin airline ticket sales and the company was nowhere near profitable.  Then the company acquired Travelweb for its hotel booking platform and adjusted the company’s resources to focus on the lodging sector and the very large margins available through wholesale lodging bookings. The company turned the corner to profitability very soon after entering the wholesale lodging space and began to acquire many of the top international players (Active Hotels, Bookings.com, etc.). The rest is history as the stock went from about $15 to its near $600 range today.  In short, we certainly view the revenue shortfall as a near term negative, but we have long wondered when Travelzoo would make the move to focus on the hotel/lodging space like Priceline did to better leverage the value of the Travelzoo name and its enormous subscriber base.  While it may be a 2013 story, we think Travelzoo is moving in the right direction and while the stock may be volatile for a few months during this transition, shareholders will benefit tremendously if the company is able to execute its strategy of refocusing its resources on the hotel/lodging reservation business. Often we encourage community participants to “double down” if one of our focus stocks trades significantly lower than our introduction price.  We are not now recommending such a move for Travelzoo even though it is trading significantly lower.  We believe the stock still has significant downside risk, particularly in the event of a large acquisition if it is not widely believed to be immediately accretive.

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