Trivago’s Revenues Are Taking A Trip Downwards (NASDAQ:TRVG)

Trivago (NASDAQ:TRVG) is a company that operates a search platform for hotels and other forms of accommodation, operating in the United States, Europe, and globally. The company has had a rough financial history, with the pandemic creating further issues for the company. Trivago has since had an impressive turnaround; if the turnaround is on a sustainable basis, I believe the stock is worthy of a buy-rating. As the company could see difficult times ahead of itself, I have a hold-rating for the stock.

The Company

Trivago compares prices from multiple sites, making it easy for customers to purchase accommodation from the cheapest route, as hotel room sellers often have heavily varying prices:

The site works as an affiliate for sellers, where Trivago gets a cut from the sales attributed to Trivago’s traffic.

After becoming a public company in late 2016, the stock has lost almost 91% of its value, as the company has seen decreasing revenues and difficulties relating to the pandemic:

Financials

Turbulent Revenues

To say the least, Trivago’s financial history has been turbulent – even before the Covid pandemic, Trivago’s revenues had a large variance:

Trivago’s revenues grew immensely from 2014 to 2017 at a compounded annual rate of 49%, as the company invested into growth through marketing and other efforts. The growth since turned into decreasing revenue, as revenues had declines of 12% and 8% in 2018 and 2019 respectively. As the pandemic started in 2020, Trivago’s revenues fell by a further amount of 70%. Revenues have since started to climb back as traveling is slowly recovering from the pandemic; the company’s trailing twelve months’ revenue stands at €524 million, compared to 2020’s revenues of only €249 million. The figure is still clearly below 2019’s level of €839 million.

The main question regarding Trivago’s revenues is whether the declines seen in 2018 and 2019 will continue after the company recovers from the pandemic. As revenues don’t seem to reach levels that are close to 2019 even though Covid has been mostly subsided in the company’s trailing figures, this seems possible or even likely. Although the currently suppressed buying power and high inflation should affect people’s ability to go on vacation, the revenues are still a whopping 38% below 2019 – I don’t think the lower figure can be entirely attributed to a difficult economy. The company also saw decreases in revenue of 14% in Q2, creating more worries about Trivago’s top line. The company addressed the declining revenues in their Q2 press release:

“Lower monetization, shorter length of users’ booked stays and foreign exchange rate effects, all negatively impacted our financial performance, more than offsetting the positive impact of increased average booking values, mainly driven by higher average daily hotel rates and increased booking conversion.”

I believe investors should keep a really close eye on Trivago’s revenue trajectory, as further declining revenues could pose a significant long-term risk.

Good Cost Control

Trivago has had impressive cost control measures to address the declining revenues; in 2019, the company had €720 million in SG&A and 64 million in research and development costs, compared to currently trailing amounts of €392 million in SG&A and €51 million in research and development. The company has cut back its marketing costs significantly along with further operative cuts.

Marketing makes up the majority of Trivago’s expenses, as the company spent over €90 million on marketing in Q2 alone:

The well managed cost side puts Trivago’s current trailing operating result at €68 million. The bottom line is seeing signs of stress, though – in Q2 Trivago’s EBIT declined by 65%; although I would attribute the decline mostly into larger weakness in the economy, the decreased result reflects quite poor flexibility in the short term.

Trivago has a hefty cash balance of almost €298 million – as Trivago’s market capitalization is currently only $380 million or 352 million euros, the cash balance makes up most of the company’s value. The company also has no outstanding interest-bearing debt, further lowering the company’s riskiness.

Valuation

At first glance, Trivago can seem absurdly cheap, as the company trades at a trailing EV/EBIT ratio of 1.35. With a strange revenue history and currently deteriorating earnings, the company’s valuation makes a lot more sense; I constructed a discounted cash flow model to visualize the company’s valuation.

In the model I expect Trivago’s revenues to fall by ten percent in the current year – with an increase in Q1 but a decrease of 14% in Q2, I believe this represents a reasonable expectation. Going further, I have a decrease in revenues of 5% in 2024 and a decrease of 3% in 2025. Beyond 2025, I have a nominal growth of 0%, representing that Trivago can get decreasing revenues somewhat under control, but still have declining revenues in real terms. The conservative estimates are in my opinion reasonable, as Trivago has a bad history after 2017.

As for the company’s EBIT margin, I expect the margin to drop from 12% in 2022 to 6.8% for the current year. Trivago had a margin of 6.9% in Q2 compared to last year’s 16.9%, signifying a large drop that could very well continue into the rest of the year. As I expect declining revenues in the future in real terms, my DCF model expects the company’s operating margin to decline further – in the model the company has a margin of 5.6% in 2032, down from 2023’s estimate of 6.8%.

These expectations along with a cost of capital of 13.03% put the stock’s fair value estimate at $1.37, around 25% above the stock’s current price of $1.10:

The used cost of capital comes from a capital asset pricing model:

Trivago currently has no interest-bearing debt, and as the company is quite turbulent, I wouldn’t expect the management to draw any debt in the medium-term – I have the desired debt-to-equity ratio at 0% in the model. On the cost of equity side, I have the EUR 10-year interest rate swap as the risk-free rate, with the rate being 3.15% at the time of writing. The used equity risk premium of 5.91% is Professor Aswath Damodaran’s estimate. Tikr estimates Trivago’s beta to be 1.57, a high rate as vacations are quite cyclical in nature. Finally, I add a liquidity premium of 0.6% into the cost of equity, crafting a cost of equity and WACC of 13.03%.

Takeaway

As my DCF model demonstrates, the market does not currently expect a lot from Trivago’s future. I believe being cautious is reasonable for the moment, as Trivago has not had a good revenue history after 2017. If the company can turn around the revenue trajectory, the stock would be absurdly cheap, though I would keep the stock on a watch list for the time being. As the trajectory is yet to be seen, I have a hold-rating due to the risks.