Why the stock of Trivago offers value in euphoric market

Investors with long-term perspective can accumulate on dips the Nasdaq-listed ADRs of Germany-based internet travel company Trivago (TRVG). In a euphoric market where indices have rallied to all time highs, one needs to be selective in choosing stocks and go for those that offer some margin of safety. Trivago with its strong balance sheet (30 per cent of market cap in net cash) offers that. Also, as a play on post-Covid re-opening, travel-related stocks such as TRVG could also benefit as its business gradually recovers over the medium to long-term.

Company and business

TRVG is a global hotel and accommodation search platform. Its platform allows travellers to make informed decisions by personalising their search for accommodation and providing them with access to a deep supply of relevant information and prices. In CY2019, TRVG offered access to more than 4.5 million hotels and other types of accommodation (vacation rentals, private apartments) in over 190 countries. Its closest competitor is TripAdvisor.

TRVG primarily generates its revenue on a ‘cost per click’ or cpc basis, whereby an advertiser ( hotels, online travel agencies, private apartments etc.) is charged when a user clicks on an advertised rate of a hotel or other types of accommodation and is referred to the website where the user can complete the booking. In CY2019 it generated 34 per cent of its revenue from Expedia Group (EXPE) and 40 per cent of its revenue from Booking Holdings (BKNG).

While there is customer concentration risk, this is countered by its position as one of the leading metasearch engines for travel accommodation and by the fact that one of its largest customers, EXPE, is also its majority shareholder. The company is geographically well-diversified with Developed Europe representing 42 per cent of its revenue, Americas 38 per cent and rest of the world 20 per cent.

Performance, financials

It being a part of the industry that is most impacted by Covid-19, TRVG financials were severely challenged in CY2020. With the company’s Q4CY20 results pending, consensus expectations (Bloomberg) are to close 2020 with a decline in revenue of around 65 per cent

What has been a silver-lining amid the challenges of 2020 is the efficient way in which TRVG has managed costs and optimised operations. It managed this by bringing down sales and marketing cost to the bare minimum, reducing some fixed costs and lowering headcount. Despite a significant revenue decline, TRVG is expected to end the year with only modest EBITDA loss of €12 million (vs profit of €70 million in 2019) and also generate cash (free cash flow positive). While its headline EPS will be negative, it is mainly due to a one-time, non-cash goodwill impairment of €200 million.

Current consensus expectations are that the company starts recovering well in 2021, with revenue likely to grow by a little over 60 per cent (partly due to base effect). There may be some short term risks to its current growth expectations after recent the Covid surge in Europe. Looking beyond that given its cost optimization measures, its profitability is likely to improve when revenue bounces back.

One factor to look for is how the competitive dynamics play out going forward. Even before the impact of Covid-19, TRVG business was facing aggressive competition from larger companies such as Alphabet (GOOGLE) and this was directly impacting its financials and share price performance over the last few years. With recent focus and investigation by anti-trust regulators in both the US and Europe on big tech companies and on whether they have engaged in anti-competitive practices, there might be some relief in competitive intensity for smaller companies such as TRVG.

Valuation

Based on consensus expectations, the stock trades at around 1.25 times enterprise value (EV)/ sales (2021) and 0.9 times EV/ sales (2022). This is near the bottom-end of the range for internet sector multiples. Its current valuation adequately reflects challenges it faces due to intense competition from larger players like GOOGLE and disruption in business due to Covid-19. This offers an opportunity for long-term investors in the midst of a euphoric market. Given the Covid-19 impact which most likely will be temporary and intense competition, which may abate as regulators investigate, TRVG stock can rebound over the next few years as travel returns to normal. The stock has a good margin of safety with net cash in its balance sheet at around 30 per cent of its current market cap. With the company remaining cash positive (free cash flow) even in a year like 2020 when its revenues are expected to decline by 65 per cent, its cash balances will likely increase over the years giving scope for large buybacks if valuation remains depressed.