Travelzoo Booking Engine Upgrade & Potential Deal with PCLN or EXPE
It appears that Travelzoo has released an upgrade to its hotel booking engine. The new UI is intuitive, visually appealing and overall very impressive. We also note that there is a new field listed by most rates that we currently see that reads either “Travelzoo Rate” or “Travelzoo Deal”. This is very significant because the previous iteration did not specify “Travelzoo” deal because all rates listed were for a Travelzoo deal. Travelzoo is obviously building into this upgrade the ability to offer third-party inventory – something we believe could be a watershed event taking Travelzoo’s hotel booking service from irrelevant to transformative in its impact on the company’s financials.
To date the company has essentially offered a small sampling of hotels in what we would describe as the most competitive hotel markets in the country. This means that many Travelzoo members around the world who try to search for a hotel in their chosen destination each day get the message “Our Deal Experts are busy negotiating with hotels around the world, we haven’t gotten to (whatever city) yet”, which leaves an enormous revenue opportunity on the table. We believe Travelzoo could be about to announce an affiliate deal with Expedia or Priceline or incorporate a GDS connection (Sabre, etc.) offering agency bookings. believe that a white label affiliate agreement is the most likely. Regardless which option is chosen, we believe this has the potential to make a huge impact, as Travelzoo will instantly be able to offer a very competitive rate and product to the Travelzoo members searching in essentially any market where Travelzoo members would travel and likely earn a commission in the 10-12% range on each booking without incurring any additional overhead for handling phone calls, customer service or anything else related to those bookings. While 10-12% is much lower than the 15-20% the company earns on its own deals, the net when you consider credit card processing fees, the cost to service those guests, etc. the company’s 20% take gets knocked down to closer to 12-17% range. So the revenue earned is lower, but the upside is that the company can expand from its current inventory (sources say 1500 range) to over 25,000+ hotels in every city in the world. We believe the revenue impact of the attempted hotel bookings that previously resulted in a “not here yet” message will be greater than what the company has been earning on its own deals. The cost impact of adding all of that inventory is immaterial, it amounts to the programming required to integrate with the EXPE/PCLN API. On e of our privately held companies has done this for just a few thousand dollars and the cost to process and service the bookings produced will be very close to zero as the company providing the affiliate program usually covers these costs.
Another important thing to consider if a Priceline or Expedia affiliate deal is announced, it could significantly increase the likelhood of an outright acquisition of Travelzoo. We note that Expedia’s acquisition of Travelocity started as a very elaborate white label affiliate arrangement. Eighteen months into the deal, Expedia closed on the full acquisition of Travelocity. If Travelzoo does an affiliate deal, it could lead to it being acquired by its partner. More importantly, we think Expedia’s previous move to take down Travelocity might lead any other bidders who are on the fence to move in more quickly for the Travelzoo assets before its affiliate partner could buy them.
In summary, a Travelzoo affiliate deal with Priceline or Expedia is a potential game changer for two reasons –
1) We believe it could have a material impact on the company’s financials as early as Q2 of this year
2) We believe an affiliate agreement with either Expedia or Priceline could increase the pressure on potential buyers to move up their timeline for getting a deal done.
TZOO stock is trading up about 15% from where we added it earlier this month, but we still believe its valuation does not reflect the potential of the pivot we see underway or the potential for it to be acquired by a larger player at a significant premium.
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