The Magic Formula screens have recently dug up a lot of stocks that have suffered dramatic price declines this year, such as
. 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
Offers. The search engine businesses pale in comparison to
Research In Motion
. Many of these also offer short-term ad placement, as do the full-service online travel providers like
Travelzoo's services are also easily duplicated by high-traffic web portals like
MSN network or
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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