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Trivago Sees a Strong Travel Recovery Ahead

No industry has been hit harder by the coronavirus pandemic than the travel sector, and Trivago's (NASDAQ: TRVG) first-quarter earnings report offered further evidence of that. Revenue in the quarter tumbled 73% to 38.2 million euros, as much of Europe remained under lockdown during the period. While the top line result was disappointing, the company continued to effectively control costs, scaling back on marketing expenses and reporting a loss of 4.8 million euros in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

Management was optimistic that it would benefit from pent-up demand in the second half of the year as its key markets are expected to reopen. In fact, there were already a number of signs that travel interest on the meta-search site is already ramping higher.

A couple enjoying a pool at a resort.

Image source: Trivago.

Vaccinated markets are coming back

Based in Germany, Trivago's biggest market is Europe, and the lockdowns across much of the continent explain why revenue fell so sharply in the first quarter. However, the company is seeing demand recover in countries ahead in vaccinations, especially in the U.S. and Israel.

In Israel, Trivago's qualified referrals -- or the number of clicks its travel partners get -- was above 2019 levels in April. That seems to be partly because international travel is restricted, leading to increased demand for domestic trips, a trend it expects to play out around the world.

In the U.S., qualified referrals increased from 30% of 2019 levels in January to 70% in April, a sign that one of its biggest markets is making a steady recovery as vaccination rates improve. Management also noted that trips to beach destinations were up from 2019 levels in the U.S. in April, while urban travel and international travel were still down sharply, showing Americans were returning to accessible travel.

Similarly, demand in its bidding auctions from online travel agencies like Booking Holdings and Expedia is also making a comeback, as revenue per qualified referral in the Americas improved from 50% of 2019 levels in January to 80% in April. That's a clear sign that the business is on track to return to historic levels and may surpass them, as it should benefit from pent-up demand.

As it prepares for the recovery, the company is planning to increase its spending on brand marketing in the second quarter and expects a return to positive adjusted EBITDA by the second half of the year.

Other key catalysts

In addition to the beneficial tailwinds from the recovery, Trivago has also made a number of improvements to its platform and cost structure over the last year. On the cost side, those include closing down regional offices and laying off employees. It reduced personnel costs by roughly 7 million euros in the quarter, savings that it will continue to benefit from. It also cut non-marketing costs by 37%, or 16.4 million euros, in the period.

The more important changes relate to the product itself, though. Trivago has modified its bidding auctions so that its bidding partners pay for bookings rather than clicks, aligning its customers' interests with its own. It's also made improvements for users on the platform.

It acquired weekend.com to help provide a more refined discovery product called trivago Weekend, which offers suggestions for local destinations, complete with tourist attractions and recommended hotels. This gives an option to travelers who want to get away but don't have a particular destination in mind. The product is similar to the "explore nearby" feature on Airbnb, giving travelers convenient destinations for weekend trips.

Trivago also announced a partnership with TUI Musement that gives travelers a convenient way to book tours, activities, and other experiences. This is a natural channel to monetize for Trivago, and one that also mirrors a similar move by Airbnb into experiences.

Is it time to buy?

The big test for Trivago won't come until the third quarter when pent-up travel demand will be surging during the peak summer season. Trivago stock has been a disappointment for most of its publicly traded history, but if the company can drive traffic to its website and gain regular users with the help of trivago Weekend, interest from its bidding partners will follow.

With a market cap just above $1 billion, Trivago appears to have substantial upside potential. However, it's up to the travel company to capitalize on the unique opportunity coming out of the pandemic.

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Jeremy Bowman owns shares of Airbnb, Inc. The Motley Fool owns shares of and recommends Airbnb, Inc. and Booking Holdings. The Motley Fool recommends Trivago. 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.

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