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03/26/2012

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Groove Portfolio Focus Stock
Travelzoo (Nasdaq: TZOO)


Price $23.20
Market Cap $371m
Avg. Daily Trading Volume - 361,000
Shares Outstanding - 16 million
Insider / Institutional Ownership - 96%

We believe that the following factors make the purchase of Travelzoo shares at today's levels makes for a great opportunity that could deliver outsized returns over the next 12 months for our community of investors/consumers:

1) Strength of Core Business - Travelzoo's core travel newsletter business is a unique business that continues to deliver considerable value for travel advertisers, as it is known to deliver ROI that bests other potential advertising channels. We note that the most recently reported quarter and yearly results reflected revenue growth of 23% over the same quarter last year and earnings up 70% over the same quarter last year.

2) Wholesle Lodging Business - like priceline started with its purchase of Travelweb in 2004 and continued with its purchases of booking.com, Active Hotels, Agoda, etc., the wholesale lodging (mostly hotel) business is where most of the money is made in the online travel space. Priceline, Expedia and Travelocity all became profitable growth businesses when they added wholesale hotel bookings to their mix. This approach allows the online travel agencies to access blocks of hotel rooms at a large discount for mark-up to whatever the market will allow. In many cases the combination of the markups and additional fee income they can generate on each booking allows them to make considerably more than the traditional 10% hotel commmission that historically characterized this business. As the commissions on airline tickets and car rentals moved lower to the point of near extinction, the economics of the hotel/lodging business has allowed the companies that are able to drive "heads to the beds" to grow rapidly. Look at the lodging revenue from Priceline since the company's wholesale lodging acquisition binge in 2005 - 2007 and you will see why the stock has gone from $18 per share to $730. While few companies enjoy Priceline's name recognition as a place to go to find discounts on travel and this rep allowed them to do exceedingly well when they added wholesale lodging to their mix, Travelzoo has a very interesting reputation that (to us) seems less wide spread but possibly enjoys an even stronger reputation for delivering travel discounts/value. Along with noting here that the company may be among the best positioned (based on its existing travel value publishing business) to enter the wholesale lodging space, we also note that the "Groupon Getaways" that were test marketed in 2011 are now a rapidly growing part of the company's business that was discussed in detail on the most recent quarterly conference call and we believe that the potential for that business has not been fully appreciated by investors.

3) Acquisition of Travelzoo by Larger Player - the relationships that Travelzoo has with top tier travel suppliers is quite unique and would be very appealing to any number of potential acquirors who would also like to stengthen their position in the "deals" space, including Groupon, Amazon, Living Social and even Google. Each of the named companies and several others have good reasons to covet Travelzoo's assets (primarily its relationships with both consumers and suppliers) and each has the cash and/or other currency to do a deal at any time. Given Travelzoo's founder still owns a majority stake, it would be quite easy for such a transaction to be consummated. Investors in Travelzoo at today's prices would likely reap a windfall if this scenario were to play out.

4) Short Squeeze - Travelzoo shares are perhaps best known for the original "mother of all short squeezes" that occurred nearly a decade ago and just last year a similar scenario occurred. The shares are down nearly 80% from the levels achieved during that run last year and it is easy to see how this could occur again. One need only to take a cursory glance at their favorite source for financial statistics of publicly traded companies to see the striking numbers - with close to 69% of the shares outstanding owned by insiders, 29% owned by institutions and over 20% of the outstanding shares currently sold short. These numbers suggest another significant short squeeze could occur at any time with the right catalyst. We believe that investors increasingly appreciating what the Travelzoo Getaways business can mean to its bottom line, the company's use of its rapidly growing cash resources to buy back stock (it has done this in the past at prices 25 - 35% higher than current prices) and/or real or perceived overtures from potential acquirors could all be catalysts that could cause short sellers to scramble to cover their short bets again as many apparently had to do last year.

Our due diligence leads us to believe that TZOO represents a potentially huge opportunity and the kind of situation that the Groove VC community can profit from simply by investing, consuming and promoting -

1) Investing (purchasing shares in TZOO)

2) Consuming - there are several ways that an investor can help to drive revenue for Travelzoo, thereby increasing the value of his/her Travelzoo stock -

a) Go to Travelzoo.com and use the box in the upper right hand corner of the page to register for the weekly "Top 20 Travel and Entertainment Deals".

b) Bookmark http://www.fly.com
Use this travel search engine whenever you are going to book travel. Not only does it search among all the top travel sites, it also serves up ads of the Google "Pay Per Click" variety (served up through Kayak) that will earn revenue share for Travelzoo with each click.

c) Bookmark http://www.travelzoo.com/local-deals/
Travelzoo now offers Getaways and local deals for spas, restaurants and attractions for many markets around the US and the company earns very high margins on purchases made through these programs.

3) Promoting - tell investment groups, friends, family, etc. about the opportunity to profit from online travel purchases, participation in weekly deals, etc. by purchasing shares of TZOO, using these services and showing others how to do the same.

In summary,we believe Travelzoo's operations have already been transformed in a way that will create substantial value for shareholders and the Street has simply been unable to see the forest for the trees. The Groove community's involvement will drive incremental revenue for the company and should bring many new investors into the fold. We believe that investors will profit handsomely over the next 12 months by purchasing shares at today's prices due to numbers 1 - 3 discussed above, but believe there is significant potential for the short squeeze scenario to occur much sooner than that and allow for substantial gains in a much shorter time frame as more investors begin to realize what is happening here.


 

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