Travelzoo's recent drop due to lower profit margins (based on higher customer acquisition costs) is fundamentally misunderstood.
Travelzoo acquires a new customer for $38, and that customer pays $40 for membership, leading to an immediate net gain of $2. The cost of acquisition is recognized immediately, whilst membership revenue is recognized gradually over the course of the membership. Travelzoo's acquisition costs this quarter of $2.8m represent $2.2-2.95m revenue still to be recognized. Adjusting for this quarters operating profit, this represents a gain of 8-25% profit on the previous Q2 2024 and approx 20% net profit margin.
The above calculation adjusts only for direct gains from cost to acquire new membership and does not include additional spend during the period (which Travelzoo estimates at an additional $18 per member and is already accounted for).
As Travelzoo continues to invest in acquiring new members, with favourable RoI, revenues will lag behind the true value but begin to snowball as each single quarters acquisition costs add to future quarters revenue. Travelzoo expects membership fees to account for 25% of revenues next year, which with a current revenue growth rate of 10% means membership revenue will be approx $20m (based on current revenues) but likely $25m-30m if the remainder of the business continues to bring the same non-membership revenues. I've conservatively valued growth at 15% p.a.
Challenges
- If Travelzoo cannot maintain its cost of acquisition as cash positive, the model relies more on customer spend to buoy the revenues. It is not clear if Travelzoo can continue to acquire at a cash positive rate, but they will continue to invest as long as it does so.
- If subscribers don't see enough value from maintaining the subscription then renewal rates will suffer, impacting future revenues and requiring Travelzoo to continuously invest to acquire members. Currently renewal rates are unknown as the program hasn't been in place long enough to observe.
- If the travel market declines, Travelzoo may see a downturn in membership and spend. Travelzoo believes it is somewhat insulated from this by its client base (affluent travelers, mostly 45+) and from its ability to obtain distressed offers to offer better deals, but it will likely still see some impact.
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Disclaimer
The user kaladorm has a position in NasdaqGS:TZOO. Simply Wall St has no position in any of the companies mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The author of this narrative is not affiliated with, nor authorised by Simply Wall St as a sub-authorised representative. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimates are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.
