Travelzoo (TZOO) Mentioned Cautiously at Cliffside Research; 'Strong Sell', $6.60 PT
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(Updated - September 28, 2016 1:32 PM EDT)
The firm highlighted the following:
- We estimate the company currently has a negative ROI on new member acquisitions. This implies they will lose money on new members unless they can lower member acquisition cost or improve profitability per member. We question their long-term survivability under this scenario.
- After accounting for churn, we found that the true underlying cost of new member acquisition is far higher than the company reports.
- The transition to a hotel booking platform has taken over two years and is still not fully rolled out. Ultimately we feel the company will fail in this endeavor.
- Revenue has been in decline since 2013 due to competitive pressure and lower ad rates in mobile. Mobile is now 50% of travel digital ad spend and growing. This trend will continue to pressure TZOO.
- We see the move into hotel bookings as an act of desperation as the company is seeing consistent decline in every division of their business. They are increasingly irrelevant to advertisers and consumers alike.
- Revenue per member is in long-term decline while cost per new member consistently continues to move higher.
- The popularity of a Google search for “travelzoo” has shown to be a good predictor of revenue. Search trends have been declining since 2011 with no bottom in sight.
- The founder owns over 50% of the company rendering shareholder votes meaningless. He has cashed out nearly $400mil in stock while conducting questionable business transactions.
- The company stated in their recent investor call that they expect terrorism to be a bigger impact to them in Q3 and Q4 than it was in Q2. Q3 & Q4 are also the seasonally weakest times of year.
- An IRS audit report concluded the company owes $31mil in taxes and penalties. The company has not reserved for this and it is more than the company’s cash balance of $27.6mil.
- Recent improvement in earnings is strictly the result of staff reductions and not fundamental improvements in business trends, which remain extremely negative.
- We estimate a 2017 earnings decline on increased cost and declining revenue. Longer-term if they cannot return to growth the company is essentially a zero.
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