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Is Travelzoo Stock a Good Deal?


The Magic Formula screens have recently dug up a lot of stocks that have suffered dramatic price declines this year, such as Tempur-Pedic (TPX) and Quality Systems (QSII). Travelzoo is one of the most dramatic of all. This time a year ago, the stock traded in the mid-80s! Today it is under $22.

So are we looking at the potential for another big bounce, or was Travelzoo simply a bubble stock that has come back to Earth?

MagicDiligence believes more of the latter. Revenue growth has slowed rather drastically, just 5% in the most recent quarter after several years of 20%+ growth. Management noted that they plan to increase advertising to re-ignite top line growth, but this will cut into margins in the short term. Subscriber growth has been "okay", about 6% in the most recent quarter.

I think a lot of Travelzoo's excellent 2010-2011 numbers are due to building out in Europe and launching Local Deals. It will be more difficult going forward. Geographical expansion potential is limited. Travelzoo sold its Asia-Pacific business in 2009, and any investor knows how weak Europe is and is expected to remain for the foreseeable future.

But perhaps the biggest issue I have with Travelzoo is that the firm has absolutely zero economic moat. Local Deals had a nice launch, but has limited potential due to direct competitors like Groupon, LivingSocial, and Google (GOOG) Offers. The search engine businesses pale in comparison to Research In Motion (KYAK) or Priceline (PCLN). Many of these also offer short-term ad placement, as do the full-service online travel providers like Expedia (EXPE).

Travelzoo's services are also easily duplicated by high-traffic web portals like Yahoo (YHOO), Microsoft's (MSFT) MSN network or AOL (AOL).

Simply stated, there is a ton of competition, much of it from established and highly trafficked sites, and very low barriers to entry in this business.

Against this backdrop, I have trouble seeing Travelzoo sustaining high long-term growth rates. However, the company does have a good brand, sizable subscriber base, and good client relationships already established. Given these factors, and modeling about 7%-10% growth for the next several years, I come up with a valuation of about $26 on Travelzoo.

While that is a 19% premium to current prices, that's not much of a margin of safety given the risks in the business and volatility in the stock. Travelzoo's stock doesn't get interesting until about the $15 level. At present, the risk/reward ratio is not attractive enough to garner a recommendation.

At the time of publication the author had a position in MSFT.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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