My favorite microcap (and a company I love) is back at an interesting inflection point
Travelzoo, the best travel website ever, cratered during the pandemic, recovered, and has now pulled back. It's at a price that is starting to look interesting - its worth a place on your watchlist.
If you know me in real life or have followed me on twitter for any significant period of time, you’ll already know that I love Travelzoo (TZOO) as a product/service and it is also in my portfolio.
It was one of the few stocks I picked up near the depths of the COVID-crash bottom in spring 2020. It has rallied significantly since but is now looks to be in a no-mans-land area based on technicals, while the underlying fundamentals are quite promising but potentially in flux based on the ebb and flow of COVID.
To the uninitiated: Travelzoo is a travel deals website that is free to the user. In addition to promoting hundreds of deals at any given time, they send out a weekly email, the Travelzoo Top 20, which features (at high cost to the underlying advertisers) very, very attractive travel deals. Thanks to such deals, I’ve traveled to places I otherwise likely wouldn’t have - notably, Iceland, New Zealand, and Tahiti, with great experiences and total satisfaction. Here is a sampling of recent deals:
OK, that’s enough wanderlust for now. Seriously though, if you are able to travel, and especially if you live in a major US or European city, there are lots of great deals to be dreamt about and occasionally had - sign up for their email list for your own enjoyment and benefit (and to help the KPIs in next quarter’s report).
Anyway, the company and stock:
Travelzoo is a microcap. It currently trades for $11/share, about unchanged since the before COVID times, down from nearly $20 at its post-COVID peak, and up from ~$4 at the bottom. TZOO’s market cap is about $130 million.
During Q2-21, its most recent quarter, the company generated operating income of $3.5 million. It’s likely a bit aggressive to annualize that and project a $14 million run rate, but that gives one an idea of the earnings power of the business - this could be a potential 10x multiple (or less) for an asset-light, internet, advertising, travel-focused, COVID-recovery-leveraged company, which has also not even fully realized benefits from a recent acquisition and adjustments to its cost base and a world ready for travel.
Importantly, TZOO is a company that should do very well in a COVID-handicapped world (as evidenced by the Q2-21 quarter). The business model capitalizes on the need for hotels, travel agents, airlines, et al to try to sell excess capacity - of which there is plenty in a world where travel is still a bit iffy. If the economy was firing on all cylinders, and hotels and cruises are booked solid, there would be less of a need for them to sell unbooked capacity through sites like Travelzoo (though there is still always a marginal deal to promote). If travel once again becomes completely shut down, that is also a net negative for TZOO - if one cannot travel, one cannot travel (but they have mitigated this by selling future vouchers, as discussed below). But in this limbo, where the world is open for business but many are hesitant to travel and hospitality businesses are trying to make up for a year of treading water, TZOO should shine, as it did in Q2-21. It is also worth noting that there are plenty of domestic deals, so while I posted plenty of bucket-list international destinations above, there are also plenty of promotions for hotels in NY, SF, the desert southwest, Florida, domestic flights, etc.
Travelzoo has also smartly further capitalized on such uncertainty by working with its advertisers to sell refundable vouchers (as it did in the before times, but terms have become even more flexible). Many of the deals that are advertised are vouchers that are good through 2022 or even 2023 - allowing customers to lock in great deals and dreams of traveling once things eventually hopefully return to normal.
This has led to an incredible growth of cash on TZOO’s balance sheet, since these refundable vouchers are not converted until redeemed - which has created a pipeline that did not previously exist which should (assuming COVID and the world’s handling of it gets better, not worse, and eventually people get to go on the trips they have booked) provide a tailwind for quarters and years into the future.
So on to the technicals - sadly I do believe in such voodoo - we’re in an interesting (that is a euphemism for bad) place here. As noted in the intro, shares trade at $11/share, down from nearly $20 earlier this year, and up from $4 at the pandemic lows. Unfortunately for longs such as myself, we have broken both the post-COVID upward trendline and saw a death cross recently… which is not exactly reassuring in the short term.
But I am in it for the long haul (and thanks to an excellent/advantageous/lucky cost basis, its easier to take a bit more damage if that should be the whims of the stock market gods). If one has no position, my not-advice would be to keep TZOO on a watch list for now and see if it regains the upward trend here (bounce to 12/13) or dips further.
But the earnings power has been proven (non-GAAP operating profit of $4.9 million in Q2-21 on a market cap of $130m), business conditions should be neutral to positive (the need for hospitality businesses to advertise in a less-than-full-capacity travel world), and additional upsides not detailed or quantified here (TZOO bought a business called Jack’s Flight Club right before COVID, which is a paid newsletter which shares flight deals, which has not added much to results to date but will substantially pick up once travel normalizes). They shed their loss-making Asia business last year and the right-sized North American and European businesses have a lot of operating leverage and are structured to be highly profitable when the time comes and, as evidenced by the Q1-21 to Q2-21 trend shown in the chart above, will print money under the right conditions.
In conclusion - I highly recommend that you sign up for the Travelzoo email list and then take yourself or your significant other or the squad on a nice and heavily discounted vacation that tickles your fancy, and also keep the stock on your watch list. Over time, I think it’s at least a double. But it may go lower before it goes higher based on technicals and skittishness in travel stocks as Real America refuses to do the needful to make COVID go away.
As always, never advice.
Regards,
Elmo
My favorite microcap (and a company I love) is back at an interesting inflection point
any idea why Q3 earnings release was delayed at the minute?