CEO Ralph Bartel, who last Friday filed to sell part of his controlling stake in the online publisher, reversed course Monday, indicating that he will wait until investors who recently acquired Travelzoo stock have a chance to unload their shares.
Also Monday, Mark Mahaney of American Technology Research initiated coverage on Travelzoo with a target of $25, more than $30 below where Travelzoo was trading. Calling Travelzoo's valuation "unjustified," Mahaney says the stock will likely be hurt by several factors, including the formal launch of a partly competing service from
Shares in Travelzoo, which makes its money from selling travel-related advertising on its site, fell $3.70, or 6%, to $58.48. Following a trajectory reminiscent of the late 20th century Internet bubble, shares in Travelzoo have soared from less than $10 in late April to as high as $76.58 last month.
The day's news illustrates the ongoing battle in the market over Travelzoo, a heavily shorted stock that has managed to maintain its remarkable gains over the past year despite substantial evidence that Mr. Market may be wildly optimistic in his pricing.
In his report, Mahaney -- whose firm hasn't done investment banking for Travelzoo -- notes that, based on consensus 2005 estimates, Travelzoo has recently traded at 100 times earnings. Among Internet stocks, that puts Travelzoo second only to short-seller-magnet
, and makes it priced more dearly than fellow online publishers Yahoo! and
In a private placement last month that netted Travelzoo $28 million, the company
sold 750,000 shares at $40 per share -- a 31% discount to where the stock had been trading.
Earlier this month, Travelzoo filed a registration statement with the
Securities and Exchange Commission
to enable those buyers to sell their shares -- enabling profits of $16 million, before commissions, if the sellers were to dispose of their shares at current prices.
It was on that registration statement that Bartel on Friday piggybacked the registration of 750,000 of his own shares for sale, thus doubling the number of new Travelzoo shares coming onto the market.
That move apparently wasn't appreciated by the recent private placement buyers, who seemed unhappy with the idea of so many additional shares possibly coming on the market. "After discussions with representatives of the private placement investors," Travelzoo said Monday, "Travelzoo and Mr. Bartel decided to withdraw the amendment to avoid impacting any of the private placement investors who may wish to sell their shares when the registration statement becomes effective."
Travelzoo said it intends to file a separate registration statement covering 750,000 shares of Bartel's -- shares he expects to sell at various times on the open market in an effort to diversify his investments, the company says.
However, says Travelzoo, Bartel won't sell any of his shares until at least 15 days after the private-placement stockholders' registration statement becomes effective.
Were Bartel to sell those 750,000 shares, says Travelzoo, his stake in the company would drop from 83% to 79%.
To its credit, as Mahaney writes in his report, the company has shown strong growth in its sale of travel advertising -- a popular segment in the fast-growing Internet advertising market.
The company reported $9.5 million in sales for the quarter ended Sept. 30 -- up 99% from the corresponding quarter one year earlier -- and earnings before interest, taxes, depreciation and amortization of $3.6 million.
But for Mahaney -- who acknowledges Travelzoo's attractive market segment and "strong intrinsic business fundamentals" -- the negatives outweigh the positives.
Along with the stock's current valuation, Mahaney points to other worries such as a competitive advantage that may not be sustainable and a concentrated customer base.
Mahaney isn't the only one with doubts.
As of last month, 1.1 million shares of Travelzoo were sold short, amounting to about half of the roughly 2 million company shares that Mahaney calculates are freely tradeable.