Probably no industry was hit as hard by COVID-19 as the travel sector. Air traffic ground to a virtual halt during the pandemic's first wave -- and even today, international travel is still restricted in much of the world. Meanwhile, large swathes of the public are still reluctant to get on planes due to the risks of contracting the virus, and would-be business travelers have shifted to having most meetings via videoconferencing.
For online travel agencies like Trivago (NASDAQ: TRVG), this environment presents a host of challenges, and the company's third-quarter earnings report showed that the business is still in recovery mode. Revenue in the quarter jumped 129.6% year over year to 138.6 million euros, but that was still down by nearly 50% from Q3 2019 levels.
As a hotel-and-accommodations meta-search platform, Trivago relies on bidding partners like Expedia and Booking Holdings for its revenue. If demand for hotel rooms is down, bids from its booking partners and the prices they're willing to pay will be down too, naturally. Management had not given guidance for the third quarter, but the results topped the analysts' consensus, and the company said it made significant progress on the path to recovery, especially in the Americas and Europe.
The brightest spot in the quarterly report, though, was that adjusted EBITDA came in at 15.5 million euros, Trivago's best performance on that metric in more than two years, and its EBITDA margin was 11.1%, one of its best ever. The strong EBITDA result points to a company that's emerging from the pandemic as a more profitable entity than it was before.
When I interviewed Trivago CFO Matthias Tillman following the second-quarter report in August, he noted that pent-up demand for travel in Europe helped drive the strong bottom-line performance as trips people had delayed earlier in the year were getting booked during the summer. Return on advertising spending -- a key metric for the company since most of its spending goes to advertising -- was up from 123% in Q3 2019 to 139% in the just-reported period, also helping to drive profitability.
The company declined to offer guidance, sticking with its prior target of positive adjusted EBITDA for the year, but there are a number of signals pointing to strong performances in 2022 and beyond.
Image source: Trivago.
The view into 2022
Trivago warned that this winter could deliver a setback to the travel business as some countries may experience surging COVID-19 case rates as colder weather sets in. However, management expects its business in the spring and summer of 2022 will approach pre-pandemic levels in the Americas and Europe -- its biggest markets and where most of the populations are now vaccinated. The U.S. is also set to lift international travel restrictions later this month.
In addition to the pandemic recovery, there are other tailwinds that could benefit Trivago. The company has slashed costs through layoffs and by closing regional offices. Its spending on technology and content as well as general and administrative expenses was 22.5 million euros in Q3 2021, down from 31.9 million euros in Q3 2019. Those spending cuts directly impact the bottom line.
Trivago pulled back on TV advertising during the pandemic and is in the early stages of shifting spending to channels where the results are more measurable, such as "connected TV" that links to the internet. That could help improve the company's return on advertising spending. Trivago is also focusing on partnerships with companies like Huawei that allow it to reach a wider audience. Under revenue-sharing agreements Trivago has made with such companies, it only pays them when it receives bids.
Additionally, Trivago continues to integrate Weekend.com, the travel platform it acquired to help sell accommodations to travelers who don't have a specific destination in mind. The online travel agency industry has historically delivered strong margins for players like Booking Holdings, but Trivago has struggled in this competitive sector.
Currently, Trivago stock is beaten down and trading at under $3 a share. But 2022 will give the company an opportunity to showcase the improvements it has made over the past year and a half. The company is targeting a 20% adjusted EBITDA margin over the long term. Given a healthier travel environment ahead, that goal looks within sight and could drive Trivago's market cap well above $1 billion.
In other words, 2022 could be a breakout year for this stock.
10 stocks we like better than Trivago
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Trivago wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of October 20, 2021
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Booking Holdings. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
