We like to take a look back at an IPO like Trivago (TRVG) six months after pricing and they have a quarter or two under their belt as a public company. This is also the time that IPO share lockups come off and investors evaluate their positions.

Trivago (TRVG) came public late in 2016 and has enjoyed solid fundamentals since then (both quarters were at or above expectations) and nice stock appreciation (from the $11 IPO to $18 today.)

As a reminder Trivago is a hotel search site with no inventory or assets beyond their search algorithms and data. They are similar to Kayak which was bought by Priceline (PCLN) in November 2012 for $1.65B. However Trivago ONLY does hotels and is aiming to be the search site of choice for the entire hotel industry. They have good market share in Europe and are growing rapidly in the US.

Expedia (EXPE) owns a majority stake in Trivago which they purchased late in 2012 for $632M. At the time the deal included the “opportunity” for Expedia to buy half of the remaining outstanding shares within three years and the remainder within five years. Even with the close date in 2013 those dates are coming near.

Trivago makes money by charging hotels a subscription fee and then it’s “pay by click” on offers (not bookings.) So it’s a pure advertising model.

The trouble in the Trivago business model is “garbage in, garbage out.” Many of the listings on Trivago are actually from other aggregators like Booking.com rather than hotels themselves.

It only takes an hour on the site to clicking through to displayed offers to realize the data is quite wrong. In many cases the prices were 2-3x what was quoted on Trivago. In some there were not even any rooms available on the dates selected.

The web of confusion gets more complicated when one considers that Expedia also owns hotels.com, hotwire.com, Travelocity, Orbitz and quite a few other online travel content and booking sites. How many times is that click generating revenue without an offer existing or a booking taking place?

Because multiple intermediaries are involved consumers have complained that even completed bookings end up not showing up as valid at the property they intend to stay at. This is probably just a transaction processing hiccup but it still casts doubt on the stated goal of Trivago as being to “streamline and enhance the booking process.”

It’s also worth noting that the major chains including Marriott, Hyatt and Hilton have started to lobby for industry changes to counter the consolidation that both Expedia and Priceline have promulgated on hotels and consumers. As these industry giants wake up they may become more aggressive at building their own online consumer relationships and booking technology.

For a user, Trivago feels too much like a shell game to be reliable. You can get the same results using normal Google search. Google allows you to put in parameters just like Trivago. Google’s results are not perfect either but clicking through often led you directly to the hotel booking site and not yet another intermediary like booking.com.

In the near-term none of this hurts Trivago since they get paid for all those clicks to try and find a good deal. In some ways if the site worked better they would make less money. But their goal of “building a consumer brand” requires some different success factors than getting clicks on phantom hotel offers.

Recent Results & Valuation

Results have been good over the past several years and in their first reported quarter of 2017. (Even acknowledging that related-party Expedia contributes substantially to this growth.)

Guidance for the full year 2017 is for growth of 50% which will put revenues over 1.1B Euros. EBITDA guidance is for a slight increase over 2016. Their stated long-term goal for EBITDA is 25% of revenues.

When we first wrote up Trivago we pegged the IV at $34/share. The only factor in the Quick IV model that looks like it should be adjusted is the P/E multiple. Unless they can actually improve the user experience and dial in better data they will always be at risk from someone like Google simply launching Google Hotels with a decent UI on their already-good data.

For that reason we are revising our QuickIV which now suggests a valuation of $20/share.

Conclusion & Questions

Given that Expedia owns the majority of shares and is expected to acquire more it’s hard to get excited about the risk/reward here on either the long or the short side. Could be that this ends up being more of an ARB play than a fundamental investment. But shares are now trading for 10x what Expedia paid for them initially.

We’re watching what the large hotels chains do. Companies like Marriott certainly have the firepower to push deeper into the online consumer side of hotel booking. We’ve seen Google take a step into travel with Google Flights (remember they purchased ITA back in 2010 for $700M). Right now there doesn’t appear to be a reliable industry data source for hotels so if Google wants to do it they may need to partner more broadly with the big chains and make it easier for smaller hotels to integrate into Google search and booking.

Is this an area Yext (YEXT) could get into? Is there an equivalent of MindBody (MB) for smaller hotels?

It feels like Trivago (TRVG) fundamentals are on a collision course between a great experience for consumers and maximizing their per listing click revenue.

One wonders if Expedia will take steps to fix the data problems plaguing their service and the confusion from having a listing appear multiple times across different sites?