You may have seen several TV advertisements in Australia over the last few years from Trivago with their catch phrase “Hotel? Trivago” touting its online metasearch tool for hotel rooms around the world.  The metasearch function allows consumers to research and compare hotel rooms and prices on a single site using Trivago’s real-time data on room availability and rates.

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Earlier this month, it was reported that Expedia (EXPE US) was formalising its plans for the initial public offering (“IPO”) of Trivago.  The planned timing for the IPO is for late 2016 or early 2017 on the U.S. NASDAQ Exchange.

If the IPO is successful, it will mark Expedia’s second listing of one of its portfolio of businesses in recent years, after it listed TripAdvisor (TRIP US) in late 2011.

Trivago’s value to Expedia

Trivago was founded in 2005 in Dusseldorf, Germany, where it is still headquartered and currently serves 55 countries with its hotel meta-search and price-comparisons of over 600,000 hotels on over 150 booking sites.  It competes with other metasearch sites such as TripAdvisor, Priceline’s (PCLN US) Kayak.com and Qunar.com, which is partially owned by Ctrip.com (CTRP US).

Expedia acquired its 61.6% interest in Trivago in March 2013 for €434 million in cash, with the balance of the equity still being held by its founders.  As part of the acquisition, Trivago’s founders were also to be issued with 875,200 shares in Expedia over a 5-year period.

Expedia has stated that it will not sell its shares in the IPO but Trivago will raise new equity to fund growth and further expansion into new markets.  The Trivago founders will also reportedly sell some of their shares in the IPO.

It is believed that Trivago has been profitable for several years with the U.S. being its largest market having surpassed its home market of Europe.  Apart from generating revenues from websites via a pay-per-click revenue model and showing display advertisements, Trivago plays an important strategic role in driving online traffic to Expedia’s sites to finalise and pay for their hotel bookings.

Unlike TripAdvisor and Kayak.com, which have both added a booking function on their respective websites (so their consumers never have to leave their website), Trivago has stayed a pure-play metasearch site for its consumers to research and compare (and then directed to an online travel booking site such as Expedia to finalise the booking).

Unlocking Trivago’s value and the impact on Expedia’s own valuation

In its 2Q 2016 results announced in July 2016, Expedia stated that Trivago had generated US$660 million in revenue in the preceding 12 months, over 3 times larger than when it acquired Trivago in 2013.  For the 2Q 2016 result, Trivago generated US$201 million in revenue, a 41% increase from 2Q 2015 making it Expedia’s fastest growing business.  JPMorgan estimates that revenue for Trivago will grow to US$753 million in 2016 and US$919 million in 2017.

20160923 Trivago sales growth chart

The business generated US$7 million in earnings before interest, tax, depreciation and amortisation in 2Q 2016 and US$22 million in the preceding 12 months. JPMorgan estimates that these earnings for Trivago will grow to US$43 million in 2016 and US$92 million in 2017.

While it is a little early to determine the value of Trivago for its IPO, we can get a guide from previous transactions in the online travel sector, namely Priceline’s acquisition of Kayak.com for US$1.8 billion in 2013 and Ctrip.com’s US$1.3 billion acquisition of its 45% stake in Qunar.com in early 2016.  Based on these comparable transactions, Trivago could be worth up to US$3 billion making Expedia’s stake worth US$1.9 billion, more than 3 times its acquisition price as well as Expedia’s estimation of fair value in its 2015 accounts of US$654 million.

So what does this mean for Expedia?

Expedia currently looks inexpensive, with its share price trading at 8.8x multiple to its 2017 earnings before interest, tax, depreciation and amortisation compared to its closest peer, Priceline, which has a multiple of 15.0x.  Factoring in the uplift in value for its Trivago stake, the remainder of Expedia’s business is currently valued at closer to a 7.9x multiple, almost half of Priceline.

Closer to home, Webjet (WEB AU) with a market capitalisation of A$1.1 billion has performed very well recently with its share price having doubled since the start of 2016.  It now trades on a multiple of 17.4x, a premium valuation to Priceline and almost double that of Expedia’s valuation.

We believe that this discount in Expedia is too deep and a successful IPO of Trivago should unlock some of the underlying value in Expedia.

One or more of AtlasTrend’s managed funds own Expedia shares.

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