Travelzoo: Does an Assessment of Growth and Valuation Suggest a Buy?

Travelzoo is a considerably smaller online travel company relative to its peers Priceline.com and Expedia . While many remain optimistic of the company's future, a simple comparison highlights problems that investors should consider before buying the stock.

Growth remains an issue
With 12-month revenue of nearly $160 million, Travelzoo is a fraction the size of its peers Expedia and Priceline.com. Given its size, and niche market to provide deal packages to customers, Travelzoo should be growing rapidly, with a large market to monetize and a large network.

The global online travel industry is growing at a rate of about 20% annually. Hence, it is still a growth industry.

If we look at the two leaders, Expedia grew 18% last year and is expected to grow another 14% in 2014. Thus, Expedia is growing at the rate of industry expansion.

Then, Priceline.com grew an incredible 28.6% last year and is expected to grow another 24% this year.

Therefore, with Priceline.com exceeding industry growth with revenue of nearly $6.5 billion in the last year, its market share consistently increases. Yet, because of Expedia's growth, it has only maintained its market share, meaning that Priceline.com's market share gains are coming from other, and smaller, online travel providers.

Travelzoo is one of those companies that is growing but far below the rate of industry expansion. In the company's fourth quarter, its sales totaled just $37.5 million for a growth rate of only 1.4%. Surprisingly, the stock traded higher on this performance, but nonetheless, Travelzoo's lack of top-line growth remains a key issue looking forward

What about valuation?
As previously said, Travelzoo traded higher after reporting earnings, and what makes this surprising is that the stock is not cheap.

Travelzoo trades at 20 times next year's earnings and 2.3 times sales. When you consider the valuations of other Internet-based companies you might think that Travelzoo is presenting value. However, it is important to remember that Travelzoo lacks the growth that we've come to expect with Internet companies like Priceline.com, Yelp, or Zillow. Take a look at how it compares from a valuation stance to its two larger peers.

In regards to Priceline.com let's just go ahead and say that it is well deserving of its premium multiple. Yes, Priceline.com is more expensive than Expedia or Travelzoo relative to earnings and sales, but is also growing considerably faster and is much more effective.

Priceline.com has an unprecedented operating margin of 36%, and this stems from the company's ability to make wise and lucrative investments. As a result, the company's return on equity is 35.7%, which compares favorably to Expedia's 5% return on equity, thus showing the wide operating disconnect between Priceline.com and everyone else in the industry.

Then, we have Expedia, and as already established, it is growing significantly faster than Travelzoo but is a cheaper stock! The only way to explain this fact is to say that the market incorrectly valued these two companies. Expedia should clearly trade at a premium to Travelzoo but does not, and this indicates that Travelzoo is not a buy following earnings and that Expedia might present investment value.

Final thoughts
As an investor, one of the best things you can do is to compare and contrast the fundamental performance and valuation of companies within a particular industry.

This strategy is the best way to identify inconsistencies, which can then unmask value opportunities. With that said, given Travelzoo's lack of growth and valuation premium, it's hard to find a reason to buy, much less explain why it's trading higher following earnings.

In regards to Priceline.com and Expedia, both appear to be valued attractively given the growth and operating efficiencies of both respective companies. Expedia definitely has the most room to improve, both in market share and in the efficiency of its business. Hence, given its discount to Priceline.com, investors might find Expedia a good long-term opportunity.

Regardless, the one thing we can say with certainty is that Travelzoo is not on the same level, which doesn't make it a bad company...but doesn't make it a good company either.