Travel series (3): Trivago (ISIN US89686D1054)- Ultra fast growing Hotel search engine, but what about profits ?

The company / IPO

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Trivago is an interesting company. Founded in Germany (where succesful startups are very rare anyway), Expedia acquired the majority (61%) in 2012 for 477 mn EUR. Then, in December 2016 Expedia decided to IPO Trivago on NASDAQ at 11 USD per share (down from an initial range of 13-15 USD).

Interestingly. it is not so easy to find out how many shares are outstanding. The IPO itself comprised 30 mn shares, 20,8 mn new shares and 9,2 mn shares from the founders. Expedia didn’t sell any shares.

Based on the F-1 prospectus, those 30 mn shares represent either 8% or 12% of the company, giving it a market cap between 2,8 and 4.3 bn USD. In the “12% case” however the founders seem to have a significant minority interest in the operating company. I am not sure what actually applies and if the  Bloomberg market cap of 2,8 bn is correct. The listed shares have additionally less voting rights than the ones held by Expedia. In any case, so far it looks like a decent return for Expedia….

The business

Trivago calls itself a “Hotel search” or “Hotel Price comparison” website. In contrast to other players (Kayak etc.) they do not offer flights etc. and they also do not do any booking.

They only refer the user for a small fee (~1,30 EUR on average) to the supplier of the offer which could be either OTAs (Booking, Expedia, HRS) or the Hotels themselves.

I found this interesting interview where the CEo of Trivago describes his strategy. The key point is the following:

Trivago tries to “bypass” Google by direct marketing and brand building and he believes that “deep vertical search” will become more and more important in the future. So far, at least from a sales perspective, the strategy seems to work. Trivago has increased top line sales by 50% for 2 years in a row, however marketing expense increased at least in the same amount, leading to increasing losses.

Additionally, he wants to create a more “individualized” experience for people, so that the search results better match personal expectations. I am a little bit sceptical how this works because other than for instance Netflix or Spotify, people do not interact so often with a Hotel search website. With only 2 or 3 touch points per year it will be a lot more difficult to really determine anything useful.

Business model considerations

One of the critical issues for Trivago is the following: If the OTAs consolidate further, then the added value of a OTA comparison site clearly diminishes. So if every Hotel is on Booking.com, there is no need for another layer. This is even more a problem as booking.com for instance  requires Hotels to ensure that they don’t offer their rooms cheaper elsewhere, not even on their own website.

Interestingly in Germany, the anti-competition authority disallowed this some months ago. So if you search for instance a room for Munich, one can easily see that in several cases the cheapest offer is actually from the Hotel website and not from a OTA. In many cases the Hotel website is 3-6 EUR cheaper than any of the OTAs (which all have the same prices).

So for Hotels, Trivago seems to be an interesting alternative, as Trivago charges smaller fees (provided a booking actually happens) than for instance booking.com who takes 10-15% of the room price.

On the other hand, in many cases all OTAs (HRS, Booking, Expedia) charge exactly the same which then clearly reduces the need for a Meta search like Trivago.

One other issue I have with the business model is the fact that I am not sure what role the marketing budget plays and what their true “steady state” profitability looks like. Clearly, acquiring new clients costs money, but I am not sure how “sticky” Trivago clients are. Some businesses scale well, some less so. Groupon for instance is clearly one of those business where more marketing expense brought higher sales but without that they struggle to keep sales constant.

One other disadvantage of their model in my personal opinion is that they only have aggregated Hotel ratings. In order to see individual reviews, one has to go to the underlying OTA (for instance booking.com). Personally, if I book a Hotel for a longer Holiday stay I found that it pays to do “deeper” research and actually read the reviews quite carefully. Sometimes for instance a Hotel changes to the worse in recent months and despite overall good ratings, the actual experience could be quite bad etc.

Finally, as I have mentioned in my Gocompare post: Price comparison sites in my opinion make most sense for the end-user, when there are relatively complex inputs required and you save time and effort by only doing it once. And price comparison sites are most profitable when they can “sell” long duration contracts. A Hotel search in principle is very simple (Locations, dates), so the added value from that perspective is quite small. Plus, we are talking about short-term or one-off type transactions which limits the economics in my opinion.

Valuation

This will be very short. As I am not really sure what amount of ownership the issued shares actually represent, we can only look at ranges.

With 750 mn USD 2016 sales, the current market cap is ~4 times sales at the low-end and 6 times at the high-end.  Compared to “MoneySupermarket” in the UK which trades at 5,8 times sales, this looks comparable, but MoneySupermarket already makes significant amounts of money and in my opinion has a structurally better business model.

The valuation could also be distorted by the fact that the free float is actually very small atr only 1/10th of the whole company.

The one big thing that is a plus for Trivago is the fact that they seem to be able to roll out their model outside their core market into the US and other countries.

Nevertheless, at the current price there is a lot of future profits already priced into the stock. We will see if they can live up to the hype, but for the time being this is again a “watch only” stock.

A (short) list of other Pros and Cons

+ very strong growth
+ simple business model (price comparison, referral)
+ founders still on board with significant stake (30%)

  • stock based compensation but should be one-off ?
  • operation risk (material weakness, US Growth status etc)
  • what is the real profitability ?
  • A/B share structure
  • valuation very high
  • underlying business profitability

 

Summary:

This is now my third attempt in the travel space and Trivago doesn’t look like a great potential investment either. There seem to be huge shifts underway in the industry which at least for me makes it difficult to see where this is going to from an individual company basis. Clearly, online booking  is growing, but valuations are high and ultimate success is hard to see. Everyone tries to get into the Online Hotel game after flights are commoditized and it is not clear who will be the winner and how much money can be made.

Trivago is not an exception. Hotel comparison makes a lot of sense but I do not know how much money they can ultimately make. The stock price implies already significant profitability and I think they need to prove this first because simply growing revenue by advertising a lot is not a guarantee for profits..

 

 

10 comments

  • Today I was reading about the current situation where media need to provide facts and figures, and for that they invite specialists that typically provide definite (‘expert’) views on their topic. However the world is different, events often are uncertain and one cannot provide definite views on them.

    Insofar, I welcome your approach where you share investment options that they seem OK, but you also show those (maybe less interesting) that they don’t look good investments.

    That said, it seems that online travel industry is not that attractive… let’s see any future posts…

  • One observation with Hotel Bookings, as I just booked my hotel for skiing holidays:

    I have now seen more than once that booking directly via the hotel gives me the same price but I get something extra. In my current example in Val Gardena, I pay directly slightly less than on Booking.com (or any other OTA) plus I get dinner included which is worth around 15-20% of the room rate.. The booking prices are usually with breakfast only. So there is clearly a struggle between the asset owners and the booking sites. This “trick” has saved me money more than once.

  • why don´t you look and Odigeo/edreams, I think the multiples are still quite attractive.

  • Off the top of my head I can name a dozen sites that seem to offer similair services, it’ll be interesting to see what happens in the market over the next couple of years.

  • Interesting post as I’ve been looking into Trivago too.

    I like their position “at the top of the funnel”. In that sense, it competes with Google. The OTAs pay CPC advertising to Google; e.g. Priceline pays about $4 bn- 5bn per year to Google.

    The branded advertising replaces the need to advertise on Google and lessens dependency on them. In that sense, it seems to be the right strategic move.

    But yes; agree valuation seems high and the low float/majority ownership by Expedia is not ideal.

    In terms of share count, i got:
    Class A IPO: 29 mm
    Class B (Expedia): 210 mm
    Founder shares: 110 mm

    So, think the market cap should be ~4.2 bn EUR

    • thanks. I have been looking for an “official” share count but haveN’t found it yet.

      • if you pull up the EV function in Bloomberg it will tell you exactly how they do the MarketCap/Share count.

        right now I see the below:

        Ticker Sec Description Par Value Shares Out Price Voting Rights MarketCap of Class
        TRVG US Equity ADR-Class A 0.06 30,026,635 11.96 1 359,118,555
        1476356D NA Equity Class B 0.06 209,008,088 11.96 10 2,499,736,732

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