Travelzoo TZOO, the premier membership club for travel enthusiasts, has witnessed an impressive rally, surging 39.7% since reporting its third-quarter 2024 results. Despite a slight revenue dip, the company's strategic initiatives and robust profitability metrics suggest a compelling investment case for both current and potential investors.
Share-Price Movement
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Strong Profitability Despite Revenue Headwinds
While Travelzoo's third-quarter 2024 consolidated revenues experienced a modest 2% year-over-year decline to $20.1 million, the company demonstrated remarkable operational efficiency. Operating profit jumped 30% to $4 million, representing a healthy 20% of revenues, up from $3.1 million in the prior year. The non-GAAP operating profit reached $4.9 million, constituting 25% of revenues, showing significant improvement from $3.9 million in the previous year.
Geographic Performance and Market Position
The company's European segment emerged as a particularly bright spot, with operating margins increasing to 17% in third-quarter 2024. While North American revenues saw a 4% decrease to $12.8 million, the segment maintained a robust operating margin of 25%, demonstrating the company's ability to maintain profitability even during slower periods.
Strategic Growth Initiatives
Travelzoo's transition to a membership-fee model presents a significant growth catalyst for 2025. The company introduced membership fees at the beginning of 2024, with legacy members (representing more than 95% of current members) exempt during 2024 but required to pay starting January 2025. This strategic move is expected to drive substantial revenues and profit growth in 2025.
Jack's Flight Club Performance
The company's 60% ownership in Jack's Flight Club continues to deliver strong results, with revenues increasing 11% year over year to $1.2 million in the third quarter. Premium subscribers grew 14%, and the implementation of price increases for new subscribers, along with expansion into Canada, has begun showing positive results in terms of marketing efficiencies and customer acquisition costs.
Solid Financial Position
Travelzoo maintains a strong financial foundation with $12.1 million in consolidated cash and cash equivalents as of Sept. 30, 2024. The company generated a healthy operating cash flow of $5.3 million during the quarter, even while executing significant share repurchases of 552,679 shares, demonstrating confidence in its business model and commitment to shareholder returns.
The stock's valuation metrics, including a forward P/E ratio of 16.85, suggest that the market may still be undervaluing the company's growth potential compared with the Zacks Internet - Commerce industry’s 25.25. This relatively low price-to-earnings multiple, coupled with the anticipated earnings growth from the membership fee implementation, presents an intriguing opportunity for value-oriented investors.
TZOO’s P/E F12M Ratio Depicts Discounted Valuation
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TZOO Battles Competitors and Conversions
Investors should remain cautious. The travel industry is notoriously sensitive to economic fluctuations, and any global downturn could impact Travelzoo's performance. Additionally, the success of the paid membership model is not guaranteed, and any significant member attrition during the transition could dampen growth prospects.
The company faces challenges in its various business segments. While its core advertising revenues held steady at $20 million in the second quarter of 2024, the company will need to ensure this crucial revenue stream remains robust. Additionally, new initiatives like Travelzoo META and licensing agreements in Japan, Australia, New Zealand and Singapore are still in their early stages, contributing only modestly to the bottom line.
Travelzoo operates in the fiercely competitive travel industry dominated by giants like Expedia EXPE and Booking.com, part of Booking Holdings BKNG. Groupon's GRPN stronghold in local deals and the rise of AI-driven personalized travel platforms further squeeze TZOO's niche. Kayak and Skyscanner's superior flight search capabilities further erode Travelzoo's relevance in a rapidly evolving digital travel landscape. Travelzoo's risky pivot to a paid model could backfire, driving price-sensitive users to free alternatives.
Investment Thesis and Outlook
Several factors make Travelzoo an attractive investment opportunity at current levels. The company's ability to maintain high operating margins, particularly in its traditionally slowest quarter, speaks to the strength of its business model. Management expects revenue growth in fourth-quarter 2024, albeit at a more moderate pace than 2023, along with higher profitability both year over year and quarter over quarter.
The anticipated substantial revenue growth in 2025, driven by the implementation of membership fees, provides a clear catalyst for future value creation. Additionally, the company's focus on affluent, active travelers who are open to new experiences (91% of members) positions it well in the premium travel market segment.
The Zacks Consensus Estimate for TZOO’s 2024 revenues is pegged at $85.57 million, indicating year-over-year growth of 1.3%. The consensus mark for 2024 earnings is pegged at $1.09 per share, unchanged over the past 30 days. The figure indicates year-over-year growth of 36.25%.
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Conclusion
For current investors, holding onto Travelzoo shares appears prudent given the company's strong fundamentals and clear growth catalysts ahead. The combination of robust operating margins, healthy cash flow generation, and the upcoming membership fee implementation in 2025 suggests significant upside potential.
For potential investors, the current momentum following third-quarter results, coupled with the company's strategic positioning and growth initiatives, presents an attractive entry point. The stock's recent surge appears justified by improving operational metrics and the company's clear path to revenue growth in 2025. Travelzoo currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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