Heavy Marketing Burdens Will Shrink Margins Yet Offer Promise

Key Takeaways

• High marketing costs and dependency on large advertisers threaten future margin expansion and revenue stability amid growing tech competition.
  
• User growth and tech improvements drive higher conversions, but direct booking trends and industry consolidation may limit long-term top-line and profit gains.
  
• Heavy reliance on brand marketing, rising competition, and industry trends toward direct booking threaten sustainability of earnings and long-term revenue growth for trivago.

Catalysts

Operates a hotel and accommodation search platform in the United States, Germany, the United Kingdom, Canada, Japan, and internationally.

• While global travel expenditures and the ongoing shift to online and mobile booking platforms have driven recent double-digit revenue growth for trivago, the company's continued reliance on heavy brand marketing spend to fuel branded traffic means that further scale may be increasingly expensive and less efficient, threatening future net margin expansion.
  
• Although advancements in AI-driven personalization and meta-search technology, bolstered by product improvements like AI-powered review summaries and Smart Search, support better user conversion and suggest potential for higher operating leverage, trivago faces the risk that tech giants with superior resources may erode its market share and increase customer acquisition costs, which could stall long-term earnings growth.
  
• While the rapid expansion of registered, logged-in users and growing member-exclusive deals have demonstrated higher conversion rates and greater user retention-now accounting for 20% of referral revenue-ongoing consumer preference for booking directly with hotels and larger OTAs could limit trivago's ability to further grow this high-value customer segment, ultimately constraining top-line and profit growth.
  
• While the adoption of the transaction-based model and the acquisition of Holisto enable trivago to diversify its revenue streams and stabilize auction volatility in its marketplace, its dependence on a small number of large OTA advertisers exposes it to potential pressure on take rates, which could reduce revenue resilience through the cycle.
  
• Despite the tailwind from increasing demand for price transparency and meta-search platforms in emerging markets, commoditization of meta-search functionality and the risk of vertical integration by OTAs and hotel chains remain major threats to trivago's long-term revenue stability and operating margins.

trivago Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on trivago compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming trivago's revenue will grow by 10.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -4.9% today to 0.9% in 3 years time.
• The bearish analysts expect earnings to reach €6.0 million (and earnings per share of €0.02) by about September 2028, up from €-24.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 48.9x on those 2028 earnings, up from -8.2x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 16.7x.
• Analysts expect the number of shares outstanding to grow by 0.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.96%, as per the Simply Wall St company report.

trivago Future Earnings Per Share Growth

Risks

• Trivago remains significantly dependent on high brand marketing spend to drive user acquisition and revenue growth, which exposes the company to the risk that rising customer acquisition costs or diminished advertising effectiveness could erode future net margins and profitability.
  
• The company reported a net loss of €6.5 million and negative adjusted EBITDA in the first half of the year, while achieving revenue growth largely through increased marketing investment, which raises concerns about the sustainability of earnings and the potential for ongoing operating losses if market dynamics change.
  
• Despite product innovations and new features, trivago continues to face intense competition from both established OTAs and technology giants expanding in travel search and bookings, threatening future revenue growth and possibly compressing commission rates and take rates across the industry.
  
• The industry-wide trend of hotels and OTAs promoting direct bookings for customer retention could reduce the volume of users seeking meta-search platforms, which may put downward pressure on referral revenue over the long term.
  
• Foreign exchange headwinds materially impacted revenues in key segments in the recent quarter, and ongoing currency volatility could continue to affect top-line results, leading to unpredictable future reported revenues and net income.

Valuation

• The assumed bearish price target for trivago is $3.8, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of trivago's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $5.51, and the most bearish reporting a price target of just $3.8.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €672.6 million, earnings will come to €6.0 million, and it would be trading on a PE ratio of 48.9x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $3.37, the bearish analyst price target of $3.8 is 11.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.