The main IPO of interest scheduled for this week is Trivago (NASDAQ: TRVG). The $400M deal is being led by JP Morgan, Goldman and Morgan Stanley with 7 co-managers tacked on for good measure. Our Quick IV points to a share price of $35 versus the $14 midpoint of the proposed range. Post-IPO, Expedia (NASDAQ: EXPE) will remain the largest shareholder and effectively control the company.
At first glance, Trivago looks like yet another online travel company. Priceline (NYSE: PCLN) is the 800-lb gorilla but Google matters quite a bit, and they have morphed their acquisition of OTA into Google Flights.
After a few pivots, Trivago has focused on hotels. There are a number of interesting things about the company and the IPO but the first one is that hotels matter more than flights and rental cars. One of our favorite comedians said, “I’d fly on the back of bird if it was $3 cheaper.”
Flights matter and rental cars matter but in those cases, price tends to dominate. We all know that the flight will be short and a car is pretty much a commodity so we want to get them as cheaply as possible. Flights are often more about schedules than price and quality.
For most vacations the bulk of your time and quality of experience will depend on your accommodation. AirBnB has exploited this to great effect, but Trivago is helping consumers who want a hotel that matches their desires but also with a price that creates extra value. If you are a fancy type you might compare the Park Hyatt with the Four Seasons and a few other select hotels to get the best price on a luxury. If you are mid-market you might tend toward a Marriott or Holiday Inn, but a boutique might offer better rooms and lower rates.
Trivago is also trying to go more deeply vertical in understanding travel preferences. It smacks more of story-telling than actual delivery but at least they understand the opportunity versus Priceline, TripAdvisor (NASDAQ: TRIP) and Google.
The quality of the story is high but the valuation is high. Post offering there will be 350M class A and class B shares outstanding. Expedia will hold 209M class B shares and control 65% of the voting power. As such, Trivago is a “controlled company” as defined by the NASDAQ. This offering is for class A shares.
At the $14 midpoint that puts the proposed market capitalization at $4.9B, which is 6.7x our estimate of 2016 full-year revenues.
Besides scale and rapid growth (50%+) along with high-profit margins, the company is pioneering a new model in travel that is akin to the real-time bidding model we see in the online advertising space.
Very high capital efficiency has allowed Trivago to grow rapidly without the need for external capital. (Other than their early start-up round.) The vast majority of their spending is variable so fixed costs are low. While in high growth mode, they are reinvesting most of their profits in growth and building market share.
Our quick IV model is below. Despite the EXPE ownership, the proposed valuation has plenty of upside from here.
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