1 Reason to Take a Closer Look at Trivago – The Motley Fool

Trivago (TRVG -6.81%) has struggled for nearly its entire history as a publicly traded company. 

The travel metasearch competes directly against the two companies it counts on for most of its business, Booking Holdings (BKNG 1.03%) and Expedia (EXPE -5.14%), which dominate the online travel agency industry. Its pre-pandemic attempts to grow by plowing most of its revenue into brand and performance marketing fell flat in a crowded field.

Additionally, the market’s shift to home-sharing and Airbnb (ABNB -5.07%) has presented another challenge for the company, though it’s responded by adding more than 3 million alternative accommodations to its listings in the last few years.

Like other travel stocks , Trivago was hit hard by the pandemic, but the company is starting to show signs of life. Revenue jumped 166% to 101.6 million euros in its first quarter, though that was still down from Q1 2019 levels by more than 50%. Management expects a robust summer travel market to drive growth in the second and third quarter, especially in Europe, its biggest market. But the biggest reason to take a look at the stock isn’t the top-line recovery. It’s the improvements in the bottom line.

Person in airport watching plane take off.

Image source: Getty Images.

A little financial discipline

Trivago slashed headcount during the pandemic by roughly 1,200 to 800 and closed regional offices to cut back on fixed expenses. The company is also a building a new high-margin B2B product where it helps companies like Huawei power their own travel searches, which is expected to boost profitability. 

In other words, the company’s focus has shifted from top-line growth to bottom-line profitability, and the Q1 earnings report shows those results are bearing fruit. On 101.6 million euros in revenue, the company earned 21.1 million euros in adjusted EBITDA in Q1, equal to a margin of 21%.

That’s in line with the company’s long-term target of 20%. Trivago should be able to achieve that after the reduction in fixed costs, as most of its spending is on marketing, which it can ramp up or down as it chooses. Though the company plans to invest in brand marketing in Q2 and Q3 to capture market share in the expected travel rebound, it will also be more judicious about marketing spending than it has been in the past.

At the Q1 run-rate EBITDA, Trivago would finish the year with 84.4 million euros in EBITDA, or $88.8 million, which gives the stock a valuation of less than eight times run-rate EBITDA. Unadjusted results in the quarter were marred by a fine from a lawsuit, but in a typical quarter, EBITDA isn’t far from net income as this is an asset-light business. The first quarter is generally the seasonally slowest of the year, and that should be especially true this year, barring another spike in COVID-19 as the travel market is finally bouncing back after two sluggish pandemic years. 

What it means for investors

Trivago’s top-line recovery has lagged behind its travel stock peers, and it will likely take the company longer to reach pre-COVID-19 revenue levels. Trivago’s business model should generate high margins if the company can control its marketing spend as it did in the first quarter. Since the company’s core value proposition is price comparison, management believes that the current spike in inflation could be a boon for travel searches on its platform.

With the stock trading at just $2 a share, investors seem to be accustomed to Trivago being a loser, but the pieces are there for a recovery if management can execute and deliver on the bottom line.

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