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Is Travelzoo Stock a Good Deal?

NEW YORK ( -- Travelzoo (TZOO) is a publisher of travel sales and specials.

The company's primary assets are its Travelzoo websites, the Top 20newsletter, the Newsflash e-mail alerts service, a few travel-based search engines (SuperSearch and, and more recently, the Groupon (GRPN)-like services Local Deals and Getaways, which provide discounted products or services from local spas, hotels, and restaurants.

Clients such as airlines, rental car companies, hotels, restaurants and travel agents pay Travelzoo advertising fees to list their offerings on their Internet-based platforms. The company has over 2,000 clients and has over 24 million subscribers and website visitors. Europe accounts for about 27% of revenue, with North America making up the rest.

Travelzoo's value proposition is fairly compelling for its clients. In the travel business, unsold inventory is a major challenge. Unfilled airline seats, cruise cabins, theater seats, and hotel rooms are undesirable, as the cost structure in these businesses are largely fixed (e.g. it's not much cheaper to fly a route when the plane is only half booked than when it is fully booked).

Even getting reduced revenue for this unsold inventory helps a lot. Travelzoo's specialty is providing a fast, flexible, and cost-effective solution for selling this inventory. Fast because there is a short amount of time between when the unsold inventory is known and when it can be sold. Flexible because the deals have to be quickly modified based on the level of demand. And cost-effective because these seats are being sold at very low margin, margin which advertising eats farther into.

When you think about the lead times, creative costs, and inflexible nature of TV, radio, and print advertising, it becomes clear how valuable Travelzoo's services can be to its customers.

The company has had a lot of success putting this proposition into action, more than doubling revenue from 2007 to today. This growth has been accomplished through organic growth, new services like Local Deals and Getaways, and geographic expansion, particularly into western Europe. Operating margins have been volatile, fluctuating between 15% and 30% over the past five years, as the company has tried to balance profitability with growth. Free cash flow has been similarly volatile, although solidly positive. Travelzoo's balance sheet is solid, with $54 million in cash and no debt.
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