Few sectors have been hit harder by the coronavirus pandemic than travel thus far. Coming into its third-quarter report, its third update during the crisis, Trivago (TRVG 0.78%) investors may have been looking for signs of an inflection point, following a dismal second quarter. The stock popped briefly earlier this week after the company released solid third-quarter earnings numbers as shares opened 12.6% higher. However, the hotel-booking specialist quickly gave up most of those gains, though it was unclear why.
Revenue in the quarter tumbled 76% to $70.9 billion, which missed estimates at $81.9 million. But in a difficult environment, the company managed to deliver positive adjusted EBITDA of 6.1 million euros, down from 11.3 million euros in the quarter a year ago. That result shows the flexibility in the company's business model, as the online travel agency significantly scaled down marketing spending, essentially cutting its TV ads everywhere except Europe. This, along with 20 million euros in cost cuts around a restructuring earlier in the year, helped deliver the adjusted EBITDA profit.
Image source: Trivago.
On a generally accepted accounting principles (GAAP) basis, the company had a net loss of 2.3 million euros, or $0.01 per share, ahead of estimates of a loss of $0.03 per share.
Trivago saw some traction in the quarter in Europe. Travel on the other side of the Atlantic was stronger than expected, as coronavirus cases were low over the summer, which helped interest in local travel to nature destinations. However, rising COVID cases in October have dampened the recovery in Europe. With demand falling in its home market, Trivago now expects negative EBTIDA for the fourth quarter.
Elsewhere, results have been mixed. The Americas have trended favorably since August with a recovery in the U.S. and Latin America, and Brazil is looking relatively strong heading into summer in the Southern Hemisphere. In its Rest of the World segment, which includes mostly Asia, demand in Southeast Asia has been trailing off, while Australia, India, and Japan are experiencing a recovery.
With COVID cases rising in much of the Northern Hemisphere, Trivago will continue to face some challenging months ahead, but the company expects a recovery by the second half of 2021. There is likely to be substantial progress in containing the pandemic by then, either from a vaccine or treatments, which should unleash pent-up demand for travel as the company began to experience in Europe this summer.
The recovery case
Trivago shares are down 50% year to date, underperforming its best-known online travel agency peers, including Booking Holdings, Expedia, and TripAdvisor. That alone gives Trivago a chance to double if the stock can return just to pre-pandemic levels, and the company has demonstrated its ability to scale the business up and down according to demand. It was able to deliver an adjusted EBITDA profit during the third quarter, and only saw its cash balance decline by 2.3 million euros.
However, the company hasn't been sitting still during the pandemic either. It's made a number of changes and improvements that should put it on a better footing in a post-COVID environment. It's introduced a local discovery option for travelers who are looking to find accommodations options nearby, but don't know exactly where they want to go.
Trivago also trimmed fixed costs in marketing and general and administrative that should make it more profitable when it returns to full health, and it's introduced a cost-per-acquisition (CPA) model for advertisers on its platform, helping them align their spending on Trivago with their returns as they'll pay for actual bookings, rather than just clicks.
CFO Matthias Tillman said in an interview that CPA was something that its bidding partners had been asking for, and it should help increase customer retention over a long time and align its customers' interests with Trivago. The company has also continued to expand its alternative accommodations listing and now has 3.8 million, giving travelers plenty of options other than hotels.
In addition to those drivers, the company could also see less competition from Alphabet's Google, which is under antitrust scrutiny in both the U.S. and Europe. That could open up more demand for traditional online travel agencies like Trivago and its peers.
In the five years since its IPO, Trivago has mostly been a disappointment. In fact, the travel stock is now down nearly 90% since its IPO, but the challenges from the pandemic will eventually fade. Trivago has made a number of changes to create a stronger, more streamlined business, and if it can deliver results that back that up in another year or two, the stock could easily double or triple from here.
