There is a lot of uncertainty in the world due to Russia’s invasion of Ukraine. It has exacerbated inflationary pressures and is the biggest war in Europe since World War 2. It’s also added another risk to the list of reasons that should concern investors.
One strategy to outperform in this environment is to look at trends that are less affected by these developments such as the remarkable recovery in travel. Recent earnings reports and commentary from management teams at airlines and hotels have been very positive and indicated that Q2 and Q3 could bring a record amount of travel volumes.
They also discussed how customers are absorbing higher prices with no effect on demand, reflecting pent-up demand after people put off vacations and celebrations for nearly 2 years. The recent market volatility has also created opportunities to buy travel stocks at very reasonable valuations, especially when considering that they are likely to have a powerful earnings tailwind over the next couple of years due to strong pent-up demand.
One of the biggest winners will be online travel websites like Trivago (TRVG). Read on to find out why TRVG is a travel stock with major upside over the coming months…
Company Background
TRVG was founded in Dusseldorf, Germany in 2005. It specializes in online booking for hotels, car rentals, and other travel services. In 2012, Expedia (EXPE) bought a majority stake in the company. The company’s offerings are available through 53 specialized websites and applications in 31 languages.
It derives the bulk of its revenues from advertising and affiliate revenue from visitors to its price comparison website and tools. It also offers free and fee-based versions of its Hotel Manager product, which hotels use to advertise on Trivago’s digital properties.
Not surprisingly, TRVG’s business was wrecked by the pandemic causing revenues to drop by more than 90%. The company instituted aggressive cost cuts including the reduction of its workforce. These efforts have borne fruit as the company was profitable and had positive free cash flow on a trailing twelve-month basis.
Growth
TRVG has 2 different growth stories. One is the recovery from the pandemic. In 2019, the company generated $840 million in revenue. In 2020, revenue plunged to $248 million before slightly recovering to $361 million in 2021.
Analysts are projecting $642 million in 2022 and $808 million in 2023. This bodes well for its near-term profitability as the company has already managed to become profitable at lower levels of revenue due to streamlining operations and cutting costs. Additionally, if the travel boom proves to be stronger and more durable than the current forecast, EPS could see an upside surprise.
The other part of TRVG’s growth story is its long-term growth. Here, the picture is less clear as the company’s revenues plateaued in 2017 and were trending lower even prior to the pandemic. Unlike many travel stocks which are projected to exceed 2019 revenue levels in 2022, TRVG isn’t forecast to until 2024.
Unless this changes, TRVG is more of a ‘trade’ on the recovery in travel.
Value
Earnings growth and a low valuation are a powerful combination for stock price returns. TRVG’s multiples have been pummeled due to the weakness in travel and selloff in growth and Internet stocks since February 2021.
But, it’s also hard to value TRVG without taking into account its coming earnings recovery as travel levels normalize in its primary markets. Another aspect to take into account is TRVG’s $280 million in cash, and it has no debt. It also has impressive gross margins at 98.6%.
POWR Ratings
The POWR Ratings are quite bullish on TRVG as it’s rated an A or a Strong Buy. A-rated stocks have posted an average annual performance of 31.1%, outpacing the S&P 500’s average annual 8% gain.
TRVG also has strong component grades including an A for Growth and Value. Earnings are expected to more than triple over the coming years as revenue normalizes. Despite this, the stock has a forward P/E below the market average. Click here to see more of TRVG’s POWR Ratings including component grades for Momentum and Quality.
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TRVG shares were trading at $2.12 per share on Thursday afternoon, down $0.03 (-1.40%). Year-to-date, TRVG has declined -2.75%, versus a -7.48% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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