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Robert Stephens, CFA
Robert Stephens, CFA
Articles (111) 

Why Trivago Has Turnaround Potential

The company’s evolving strategy could boost its financial performance

October 26, 2018 | About:

A refreshed strategy has the potential to catalyze a recovery for Trivago (NASDAQ:TRVG)'s stock price. The company is cutting advertising spending in order to refocus the business on profitability, rather than sales growth.

Its decision to broaden its listings to include alternative accommodation could widen its customer base. Although the company continues to lack a clear competitive advantage, its investment in new technology could improve customer retention rates.

Having fallen 22% in the last year versus a rise of 3% for the S&P 500, the stock could offer recovery potential.

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Refreshed strategy

Strategy changes being implemented by Trivago could improve its financial performance. In response to bidding partners such as Booking Holdings (NASDAQ:BKNG) and Expedia (NASDAQ:EXPE) reducing their spending on the company’s platform, it has switched its focus from sales growth to profit growth. Given that a large proportion of its outgoings are made up of variable costs such as advertising expenses, it has been able to quickly reduce its overall cost base. In the third quarter this resulted in an increase to its return on advertising spending (ROAS), as well as a move to positive Ebitda following a loss in the same quarter of the previous year.

The company was able to increase ROAS across all three of its operating segments. It believes that further improvements could be ahead as it becomes increasingly selective and efficient in how it spends its marketing budget. This is causing an improvement in the quality of referrals to the company’s advertisers, which may improve their performance and lead to increased spending in future.

Growth opportunity

While Trivago has previously focused on building a dominant position in the hotels market, it is now broadening its range of listings. It is seeking to add a greater proportion of alternative accommodation such as vacation rentals, with such listings increasing to over 1 million by the end of the third quarter. This could not only act as a growth catalyst, but also help to diversify the business, with rivals such as Airbnb reaching total listings of 4 million in 2017.

Since 2017, Trivago has been able to increase its own alternative accommodation listings by 750,000 as it seeks to diversify into previously underrepresented areas. While this growth has been significant, the company is taking a gradual approach to its increasing exposure to the alternative accommodation market. It is seeking to maintain its focus on personalization as a key differentiator versus rivals.

Loyalty

One potential risk facing the company is a lack of a competitive advantage. Trivago is highly reliant on its bidding partners, and their willingness to try advertising on other platforms such as Google’s hotel search tool could be a threat to profit growth. They are also seeking to improve their own ROAS, which is contributing to lower levels of spending. Customers, meanwhile, are highly price-conscious and are likely to be willing to shop around among rivals for the best deal.

Trivago is aiming to build its economic moat through an improved user experience. It has spent the last two years focused on reshaping its major technology platforms. This has culminated in the recent release of a new app. It seeks to offer a greater breadth of functionality and information to users, as well as an improved interface. While the app has only been available for a short time, the company has found that users stay significantly longer in the new app and are consuming more content. Further innovation alongside new software infrastructure could lead to greater customer retention rates.

Outlook

A changing strategy has the potential to produce a recovery for the Trivago stock price. It is refocusing on profit instead of sales, while seeking to become increasingly efficient in how it spends its marketing budget. A broader range of listings may also diversify its appeal, while allowing personalization to differentiate it from peers.

Although the company may lack a distinct competitive advantage, innovation could produce a wider economic moat. Investment in new technology such as a new app could lead to increased content consumption and a higher customer retention rate. Having underperformed the S&P 500 in the last year, the stock could produce a successful turnaround.


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