I was reading the finances of something called Travelzoo (TZOO) because I usually look to the start-up internet businesses as examples of a stock market gone crazy.
But as I studied to study the actual business model, I was pleasantly surprised by what I found.
Turns out, they have no debt. They have $27 million in cash in the bank. Earnings have grown at a rate of 22% annually since 2005. And best of all, and this is the kicker with internet companies of any kind, Travelzoo has funded its growth organically without having to give up large chunks of the business through equity financing that ends up diluting the pre-existing shareholder base and almost defeating the purpose of the growth.
Back in 2009, Travelzoo had 16.4 million shares outstanding. Now, it has 14.5 million. That’s an 11% share count reduction in seven years. It’s not something I consider a meaningful source of wealth creation, but rather, I tip my cap to the management team for being able to avoid the excessive dilution that is a common characteristic of nearly internet company that often has a self-sabotaging effect on returns once you measure results fifteen years later.
This is something I’m going to have to study more in depth because the price of TZOO stock is only $10.20 per share. At first glance, that seems wildly cheap. With those 14.5 million shares outstanding, the current price of the stock values the business at only $145 million.
Strip out the $27 million in cash, and the valuation is $118 million for the operating business. And the business itself is earning $11 million in net profits for a P/E ratio of only 10.7. When’s the last time you saw a profitable, cash-rich internet company trading in the 10x earnings while it was still in the small-cap stage of growth?
I’m trying to figure out why the stock is so cheap. There’s gotta be catch in there somewhere. It appears the core business model relies on getting online visitors matched up with airlines and hotel companies and then earning an affiliate commission for making the match with each sale. The low valuation might be a nod to the brutal competition in this space and the flimsy whims of relying on hotel payouts (e.g if a hotel lowers its commission, it seems that Travelzoo isn’t going to have that much pricing power unless excluding it from its network results in a meaningful sales loss for the hotel or airline).
It’s a business that I want to check out. Even if the core business model proves a bit flimsy after a bit of examination, I still have to tip my cap to Holger Bartel and the management team for doing what all smart businesses with uncertain futures ought to do–minimize debt and load up cash so you can survive the lean years. I was getting ready to make fun of someone for buying TZOO shares, but as I look to the five-year strength of the balance sheet and profit growth, I gotta admit that there seem to be a rational basis for making an investment here.