New Trade: Long Priceline(PCLN) vs Short Travelzoo(TZOO)

By: ispeculatornew
Date posted: 11.16.2009 (5:00 am) | Write a Comment  (1 Comment)

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pclnOver the weekend, I had more time to go over some numbers while looking for the next (hopefully) winning trade. Just a few days ago, I closed out a trade that involved a play on travel, Ctrip vs Expedia. There are two other names that I follow closely and I am now picking them for my next trade. It is rather ironic for me to go short on Travelzoo given the fact that I have used the service considerably and still like to visit their website.

But the fact is that Travelzoo has gained 174% in the past year and looks overvalued in my opinion, especially compared to what most consider to be the leader in the field, Priceline.com. Even thouggh Priceline has been there for a long time, it still shows impressive growth and in fact seems to be gaining both more traffic and more revenue than Travelzoo. You can take a look at Compete’s traffic data for the past 12 months (see graph at the bottom of this post). Travelzoo is up 36% while Expedia shows a 44% improvement.

In my opinion, Travelzoo’s model is great for many customers, especially those who do not know exactly where they are headed and are simply looking for the best deal around. They do have a strong business relationship but there are 2 problems:

-It is difficult to translate those visits into revenues
-The business is not as scalable as Priceline’s business.

tzooOne good way to prove my point is to look at Travelzoo’s margins. They do not seem to improve much over time as it seems that every dollar revenue also comes with extra costs. The profitability of the company has therefore not improved much over time. Part of it was because Travelzoo was trying to expand overseas and some of those entures failed miserably. In fact, Travelzoo announced it was closing its Asian operations.

On the other side, Priceline continues to build a strong brand and to appeal to the US consumer, its main focus.

Just take a quick look at these sales growth numbers over the past few years and you can see exactly what I mean

Travelzoo Sales growth:

2004: 87.20%
2005: 50.75%
2006: 36.94%
2007: 13.50%
2008: 3.16%

Priceline Sales growth:

2004: 5.87%
2005: 5.28%
2006: 16.67%
2007: 25.49%
2008: 33.73%

These companies are going into opposite directions. So the question that remains is if their pricings represent that fact correctly and in my opinion they do not:

Bloomberg estimates the earnings for the current year by Travelzoo to be .305$ while Priceline has an earnings estimate of 10.195$. The Price Earnings for next year are much higher for Travelzoo which in my opinion simply does not make sense.

priceline-com-travelzoo-com_uv_1y

Disclaimer: No return is guaranteed and each recommendation should be considered within the investor’s individual situation. As with any financial investment, there are risks involved.

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1 Comment

  1. Comment by IS — November 17, 2009 @ 7:56 am

    Opening prices:

    PCLN: 203.54
    TZOO: 15.17

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