Membership Conversion And Exclusive Travel Deals Will Define Our Future

Key Takeaways

• Investment in member acquisition and marketing is expected to drive membership growth and revenue as free members convert to paid memberships.
  
• Strategic share repurchases during market volatility signal confidence, potentially enhancing earnings per share and cash flow.
  
• Increased investment in member growth and travel product purchases might pressure margins, with limited market expansion signaling possible future revenue challenges.

Catalysts

Operates as an Internet media company that provides travel, entertainment, and local experiences worldwide.

• Increased investment in member acquisition and marketing is expected to drive higher membership growth, which will subsequently contribute to revenue growth as more members convert from a free to a paid membership model.
  
• Travelzoo's introduction of membership fees and conversion of Legacy Members to paying Club Members, alongside acquiring new Club Members, is anticipated to generate recurring revenue streams, positively impacting revenue growth and profitability over time.
  
• As revenue from membership fees is recognized incrementally over subscription periods, the company expects a compounding effect on revenue. This approach should bolster revenue growth in future quarters while offsetting immediate marketing expenses.
  
• Strategic share repurchases during market volatility indicate confidence in the company's growth prospects and could lead to enhanced earnings per share as cash flow improves and profitability increases.
  
• Travelzoo is leveraging its global reach and strong supplier relationships to secure exclusive travel deals, which are expected to attract new members. This strategy is likely to enhance both revenue and net margins by enticing more affluent travel enthusiasts to join and spend on higher-margin club offers.

Travelzoo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Travelzoo's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.2% today to 15.6% in 3 years time.
• Analysts expect earnings to reach $16.1 million (and earnings per share of $2.34) by about May 2028, up from $13.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.5x on those 2028 earnings, up from 13.4x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 16.9x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.52%, as per the Simply Wall St company report.

Travelzoo Future Earnings Per Share Growth

Risks

• Operating profit decreased by 34% year-over-year as Travelzoo invested more in member growth, which may impact net margins negatively in the short term.
  
• The company's GAAP operating margin fell to 16% in Q1 2025 due to increased investments, suggesting potential short-term pressure on earnings.
  
• Although revenue growth in Europe was only 1%, implying limited market expansion, this could affect future revenue growth if similar trends continue.
  
• Increased costs from distressed travel product purchases classified under cost of revenue could put downward pressure on gross margins.
  
• Hesitance among international travelers, particularly Canadians coming to the U.S., may dampen revenue growth if not offset by other market dynamics.

Valuation

• The analysts have a consensus price target of $25.25 for Travelzoo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $35.0, and the most bearish reporting a price target of just $17.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $103.3 million, earnings will come to $16.1 million, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $16.12, the analyst price target of $25.25 is 36.2% 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.