Trivago: Dissecting The Fallout
Oct. 27, 2017 5:37 Seeking Alpha
Trivago made fresh 52-week lows after its Q3 earnings report showed a deceleration in revenue growth and decline in RQPR, its closely watched metric that tracks its revenue per referral.
Shares originally lost momentum in early September when the company lowered its guidance.
The company has shed more than 60% of its value from its mid-summer highs and is trading 20% below its IPO price of $11.
Given that Trivago's punished share price already prices in an armaggedon scenario, its risk-reward profile is compelling. The company is still growing, albeit slower than originally anticipated.
As of late, there seems to be no end to the bad news for Trivago (NASDAQ:TRVG), the Dutch-based travel company whose business model centers around pumping maximum spend into advertising and earning referral fees when users complete purchases on third-party travel sites. At present, after a precipitous >30% decline post-Q3 results, Trivago seems to be finding a bottom - especially after its stock has gotten sliced by two-thirds since summer.
Amid the doomsday chatter, investors are forgetting that there's value in Trivago's brand, which has gained momentum among travel bookers. Its referral count keeps climbing up, especially in the key Rest of World segment. The decline in revenue per referral (3% y/y as of Q3) is more than offset by the 20%+ growth in referrals.
Don't count Trivago out yet. While catching a falling knife is always a risky play, the risk-reward profile of Trivago looks extremely compelling as the stock is getting punished for its lower forecast. A stronger-than-expected travel season or sudden uptick in users can be all it takes to push Trivago's performance over its already low expectations and send the stock back over the edge.
Recall that just a few months ago, Trivago's stock was climbing on investor enthusiasm for its growth post-IPO. The company went public in December 2016 at $11/share and quickly shot up to twice that value. Now, with its market cap sinking below the $2 billion mark, Trivago looks vastly undervalued for a company that's at a $1 billion-plus revenue run rate and expanding its profitability metrics alongside growth.
Trivago's results weren't all that bloody, and certainly not one that merited a 30% stock decline.
The company reported revenue of €287.9 million, up 17% y/y from 3Q16. It's true that this represents marked sequential deceleration from 2Q16's growth of 67% - without any context, this large of a drop would certainly merit a huge selloff.
But this is old news. Trivago in an early September press release already announced a cut to guidance that sparked a selloff. The company already cut its revenue guidance to +40% y/y for FY17. Trivago's Q3 revenue results put its year-to-date revenue at €853.8 million, up 46% y/y, still tracking ahead of its full-year guide of 40%.
Note also that this full-year guide of 40% was only reduced from a prior guide of 50%, last affirmed in a late July press release. While a guidance drop certainly merits some level of selloff, a 10% guidance cut shouldn't spark a 60% stock decline.
To hit 40% growth for FY17, Trivago would need to post €1,055.9 million in full-year revenues - or an incremental €202.1 million in Q4 - this represents only 19% y/y growth over 4Q16 revenue of €169.2 million. At first blush, this seems like a highly attainable target.
Trivago did drop its guidance even further (but only slightly) along with its Q3 release, now expecting 36-39% growth for the year. To achieve the midpoint of this guide, Trivago only has to post €183.2 million in 4Q17 revenues, or only 8% y/y growth. This macabre scenario is probably unlikely, and the company has probably cut guidance in a classic "kitchen sink" maneuver to reset the bar low - similar to General Electric (NYSE:GE) in its earnings release last week. The company has plenty of room to exceed its new 36-39% guidance and even go beyond its prior 40% guidance.
In other news, the company did swing to an adjusted EBITDA loss of €7.1 million, down from a gain of €6.3 million in 3Q16. This was primarily driven by a 4% increase in sales and marketing expenses as a percentage of revenue; Trivago is spending $0.95 of every dollar of revenue on ads. Because the company's business so heavily centers around advertising to acquire users and clicks, I would view this as investment, not a deterioration of operating performance.
The company has still generated €15.3 million in positive adjusted EBITDA in year-to-date 2017, though this is slightly down from €16.3 million in the prior-year quarter.
Key metrics are still holding up, though not as good as expected
To capstone the deceleration in revenue growth, we have to turn to Trivago's revenue components. The company is still generating positive referral growth - 20% y/y - though this is down substantially from Q2's growth rate of 59%, driving the bulk of the deceleration. On the other hand, revenue per qualified referral, RPQR, is declining slightly.
Whereas Trivago in the past was driving growth via increases in both referrals and revenue per referral, its growth now heavily anchors on sheer referral volumes, largely a function of site visitors, clicks, and advertising spend. Trivago is spending more and more on advertising, which should drive more traffic growth, though its advertising efficiency is down. The company's return on advertising spend (ROAS) metric declined to 111% in Q3, down from 115% in 3Q17.
It's fairly clear that Trivago's growth is no longer in its prime. Both of Trivago's major growth drivers - referral growth and RPQR expansion - have seemed to suddenly "switched off."
RPQR will probably never return to its full glory, as Trivago's largest advertising partners - Priceline (NASDAQ:PCLN) and Expedia (NASDAQ:EXPE) are targeting less spend on third-party platforms. In Trivago's earnings deck, the company notes:
We believe our financial performance in Q3 2017 was negatively impacted by our largest advertisers having changed their profitability targets on our marketplace. As a result, we expect to see less revenue concentrated in our largest advertisers in Q4, negatively impacting our near-term revenues and profitability.
While these third-party agencies may not be willing to pay as much for a referral now, Trivago can still drive growth through increased site traffic and higher referral counts. This metric relies on internal execution, not the whims of third-party advertisers. As long as Trivago can continue to herd more users to its site (it's certainly spending enough on ads to achieve good traffic results), it should still be able to see top-line growth, even if the growth falls short of what was seen in quarters past.
Trivago's EV/FTM revenue valuation - at a huge discount to Priceline and still 20% below Expedia - prices in further fundamental deterioration that hasn't showed any signs yet of materializing:
Given that Trivago is still growing - albeit at a slower rate - it should still have room to outperform its targets and see some revival in its stock price, though a return to the $20 mark is probably unlikely.
Going forward, assuming Trivago can post Q4 revenues that exceed its new, lowered guidance bar, the company should be able to achieve revenue valuation at least on par with Expedia (2.3x), implying a price target right in the $11 range, its IPO price, a value it should be able to reclaim without too much effort.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Comments (364) |+ Follow |Send Message
good article. 11 seems right for a target. Just bought in and will probably continue to add.
27 Oct 2017, 06:00 AM Report Abuse Reply0Like
Comments (7) |+ Follow |Send Message
I'm surprised you made no mention of mgmt saying on the earnings call that there could be potentially no growth, or negative growth for the first half of 2018. The growth story is in serious question.
27 Oct 2017, 07:54 AM Report Abuse Reply0Like
Comments (73) |+ Follow |Send Message
Mgmt said they had not completed their budget yet. Thus, there could be no growth, little growth, or negative growth until the second half of 2018. Yet, everything has a price. Is $7.5 a good price? They have no debt, and $250 net cash. The stock trades at a meager 2 times sales. This stock as you know is explosive. It could be bought out in an instant at $15. It has a world wide following and it could have a massive and long runway for years to come. Time to make your bet. Long/short/no position.
28 Oct 2017, 11:38 AM Report Abuse Reply2Like
Comments (1726) |+ Follow |Send Message
They did clarify in the call growth would not be negative but could be in the low to high single digits.
30 Oct 2017, 03:52 PM Report Abuse Reply1Like
Comments (181) |+ Follow |Send Message
Question is, how low will it go? Do I hear 5?
27 Oct 2017, 03:34 PM Report Abuse Reply0Like
Comments (289) |+ Follow |Send Message
Good article, thank you. Unfortunately I held TRVG into earnings. Thought all the bad news is priced in. Mistake. Cut my losses and am on the sidelines for now. I do agree this was likely the kitchen sink quarter.
29 Oct 2017, 01:54 PM Report Abuse Reply0Like
Comments (143) |+ Follow |Send Message
Please don't compare Trivago to Priceline on relative valuations as there is no way Trivago is ever going to reach Priceline's profit margins - nor will Expedia for that matter.
PCLN desrves its higher multiples - Trivago should concentrate on simply making profits - even if that is 6 months away!
All the revenue growth in the world is not going to help if Priceline & maybe Expedia refuse to bid more on performance based marketing - thereby lowering rates for everyone by reducing competition. That is why RPQR is falling and may continue to fall
30 Oct 2017, 04:14 PM Report Abuse Reply0Like
Comments (213) |+ Follow |Send Message
I agree this stock feels like it's going to $3
31 Oct 2017, 06:27 PM Report Abuse Reply0Like
Comments (181) |+ Follow |Send Message
I'm a buyer at 3
08 Nov 2017, 07:41 AM Report Abuse Reply1Like
Comments (1) |+ Follow |Send Message
RPQR is also perhaps at least in part falling because they are getting more % of referrals from ROW, which has a lower RPQR.
01 Nov 2017, 06:19 AM Report Abuse Reply0Like
Baron Chen, Contributor
Comments (5) |+ Follow |Send Message
Don't forget that Expedia owns 60% of this thing