Leveraging A Large Member Base With New Fees Will Improve Future Prospects

Key Takeaways

• Introduction of membership fees is expected to significantly boost revenue and earnings, relying on a large existing member base.
  
• Strategic share repurchase program and cost management could enhance profitability and shareholder value.
  
• Metaverse investment and future membership fees pose risks to revenue growth amid decreasing Q3 revenue and cost-conscious consumer pressures.

Catalysts

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

• The rollout of a membership fee starting in 2025 for legacy members is expected to drive substantial revenue growth, as these members constitute over 95% of the current membership base. This is likely to significantly impact Travelzoo's revenue and earnings positively.
  
• The company plans to keep fixed costs relatively low while increasing revenue, which could lead to higher operating margins and enhanced profitability over time. This strategy is geared towards improving net margins.
  
• Jack's Flight Club, a subsidiary, reported an 11% increase in revenue and a 14% increase in premium subscribers year-over-year. This growth, alongside price increases and international expansion, suggests a positive impact on future revenue growth and profitability.
  
• Travelzoo plans to add new benefits to paid memberships in 2025 to enhance customer value, which could lead to higher retention rates and increased customer acquisition, positively impacting revenue and potentially net margins.
  
• The company has implemented a strategic share repurchase program, indicating potential EPS growth as fewer shares on the market could lead to higher earnings per share, enhancing shareholder value.

Travelzoo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Travelzoo's revenue will grow by 28.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.1% today to 23.0% in 3 years time.
• Analysts expect earnings to reach $41.4 million (and earnings per share of $3.25) by about December 2027, up from $13.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.9x on those 2027 earnings, down from 18.4x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 25.4x.
• Analysts expect the number of shares outstanding to grow by 2.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

Travelzoo Future Earnings Per Share Growth

Risks

• Travelzoo's consolidated Q3 revenue decreased by 2% from the prior year, which is slightly below expectations, raising concerns about potential revenue growth in the future.
  
• The addition of a membership fee in 2024, which could negatively impact member retention and subsequently decrease future revenue if existing members are unwilling to convert to paying members in 2025.
  
• The recognition of membership fees as revenue is spread over the subscription period, whereas acquisition costs are recognized immediately. This could potentially impact net margins if member acquisition costs increase.
  
• Travelzoo is investing in metaverse travel experiences, which although promising, could present financial risks if the market response and adoption are slower than expected, impacting earnings.
  
• Reduced demand and increased consumer cost-consciousness in the travel industry might pressure Travelzoo's core advertising revenues if their offerings do not meet price-sensitive consumer expectations.

Valuation

• The analysts have a consensus price target of $25.0 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 2027, revenues will be $180.4 million, earnings will come to $41.4 million, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 7.0%.
• Given the current share price of $21.25, the analyst's price target of $25.0 is 15.0% 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.