Trivago (Nasdaq:TRVG) expects to raise $399 million by offering 28.5 million shares, of which 37% of the shares will be sold by company insiders. The share price is expected to between $13 to $15. Assuming Trivago prices at the midpoint of the proposed range, it would command a fully diluted market value of $4.9 billion.

The underwriters for the IPO include: J.P. Morgan, Goldman, Sachs & Co., Morgan Stanley, Allen & Company LLC, BofA Merrill Lynch, Citigroup, Deutsche Bank Securities, Cowen and Company and Guggenheim Securities.

Business summary

Trivago is an online hotel search platform that offers consumers access to 1.3 million hotels in 190 countries around the world. The company was founded in Germany in 2005 by two graduate school friends. In 2013, Expedia acquired a majority ownership. It is now based in the Netherlands, and enables visitors of the platform to compare and search hotel prices and features before referring them to other websites to book rooms. Trivago generates revenue through advertising and building referrals. Each advertiser determines the amount that it wants to pay for each referral by bidding for advertisements on the marketplace. In its prospectus, it reports that it had 487 million referrals in the 12 months that ended on Sept. 30, 2016. The company has initiated a huge advertising campaign in the U.S. in order to build its name recognition.

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Although the company reports the majority of its growth is organic, it has also made several small strategic acquisitions, including: Rheinfabrik, an Android and iOS app development business (Dec. 2010), 61.3% of the interest in myhotelshop, an online marketing manager for hotels (July 2015), and 52.3% of the equity of base7, a cloud-based property management service provider (August 2015).

Post-IPO Structure

Upon completion of the offering, Trivago will have two classes of shares outstanding, Class A and Class B, with Class B shares being held solely by Expedia, Inc. Class A shareholders will hold 12.0% of the economic interests and 1.3% of the voting power and Class B shareholders will hold the remaining 88.0% of the economic interests and 98.7% of the voting power.

After completion of the offering, the Founders, will submit requests for tax rulings from German tax authorities to simplify its corporate structure. The company's post-IPO structure is dependent on the outcome of the German tax ruling. Assuming the post-IPO reorganization occurs, Class A shareholders will collectively hold 8.2% of the economic interests and 0.9% of the voting power, the Founders will hold 31.6% of the Class B shares and 34.1% of the voting power, and Expedia will hold 60.2% of the Class B shares and 65.0% of the voting power. In the event the post-IPO reorganization does not occur, the Founders will hold their ownership interest in trivago SE, a subsidiary of trivago N.V., with the right to contribute such shares to trivago N.V. in exchange for Class A shares or Class B shares.

Executive management highlights

Rolf Schrömgens is the chief executive officer of Trivago and was appointed as a managing director in 2016. He has served as a managing director of Trivago GmbH since 2005. Prior to working for Trivago, Schrömgens founded and served as the vice president of ciao.com from 1999 to 2001. He has a diploma in management from Leipzig Graduate School of Management.

Axel Hefer is the chief financial officer of Trivago, and was appointed as a managing director in 2016. Prior to that, Hefer served as the chief financial officer and COO of Home24 AG. He was also a managing director of One Equity Partners, which is a division of J.P. Morgan Chase. Hefer has a Master of Business Administration from INSEAD and holds a diploma in management from Leipzig Graduate School of Management.

Financial highlights and risks

The company has experienced impressive revenue growth. It reports that for the year that ended on Dec. 31, 2015, it had revenues of €493.1 million. For the nine months that ended on Sept. 30, 2016, Trivago reported revenues of €585.0 million. It has not yet been profitable and reported that it had a net loss of €51.5 million, and for the year that ended on Dec. 31, 2015, it reports that it had a net loss of €39.1 million. A majority of its losses can be attributed to its marketing campaign.

Competitors

Trivago main competitors, including Kayak, TripAdvisor (Nasdaq:TRIP), Priceline (Nasdaq:PCLN), and Ctrip International (Nasdaq:CTRP). It reports that the travel industry is becoming increasingly competitive. Trivago also faces competition from hotel chains which operate their own booking platform and offers rewards and incentives for customers to book directly.

Trivago is similar in size to Tripadvisor but trades at a higher price to sales multiple (9.4x vs. 4.82x). At the same time, its growing revenue at a much faster rate (54.8% vs. 1.45%). Overall, Trivago trades at a higher price/sales multiple than its competitors. Part of this can be explained by the faster growth, however at its current valuation it still appears slightly overpriced.

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Conclusion: Consider Caution

Trivago's record of net losses should give investors some reason to pause.

In addition, the uncertainty surrounding the outcome of German's tax ruling also adds risk.

Heightened competition and low barriers to entry make us wonder whether Trivago will be able to continue at its current level of growth.

At its current valuation the stock appears overpriced and we suggest investors consider waiting for more exciting IPOs in early 2017.