Here's Why Trivago Stock Has Been So Volatile

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Trivago (NASDAQ: TRVG) stock has had a short ride on the public markets, but it's been a wild one so far. Shares of the hotel-search specialist made its debut at $11 in December 2016 after the company was spun off by majority owner Expedia (NASDAQ: EXPE) and rocketed higher through the first half of 2017, more than doubling to a high of $24.27. However, after a disappointing second-quarter earnings report, the stock plunged, falling below $7 at one point. Today, it trades around $8.50.

Underlying that volatility was the company's erratic revenue growth. After jumping by more than 60% in the first half of 2017, revenue growth slowed to just 7% in the fourth quarter.

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What gives? That sudden swing rocked the stock, but Trivago should be able to recover. Let's take a closer look at what caused the wild volatility in revenue.

A complicated model

As a hotel metasearch provider, Trivago allows travelers to search for a hotel according to their own specifications and preferences with options such as a pool, parking, and breakfast, and it pulls in bids in from other online travel agencies and hotel chains themselves.

I talked to Trivago CFO Axel Hefer, who explained there was "a lot of noise" in the numbers and said investors should understand that "data points are relative." Trivago's erratic revenue growth was driven largely by how Booking Holdings (NASDAQ: BKNG), formerly known as Priceline, has used the platform. In 2015, Hefer explained, Booking made up about 25% of the company's revenue in 2015 but started bidding aggressively after that, increasing its revenue share to 44%, driving up Trivago's sales significantly. Direct revenue accelerated from 43% in 2015 to 66% in 2016, largely because of the change in Booking's strategy, which drove up cost-per-click rates.

However, Booking began deviating from Trivago's rules. Once users click on a hotel on Trivago's site, they aren't supposed to see any other options, but Booking was showing users alternatives, which reduces clicks on Trivago's platform, since users can just stay on Booking's site. Booking was too strong to kick out of the platform, so Trivago instead modified its ranking algorithm with a score based on user experience, which meant Booking had to pay a higher price. As a result, Booking went back to its old format, reducing its activity on Trivago and moving more of it to Google. In the fourth quarter of 2017, Booking made up just 33% of Trivago's revenue.

For the coming year, Trivago sees a decline in revenue in the first half of the year as it laps a year when Booking paid it penalties. In other words, the expected revenue decline isn't due to weakness in the underlying business, but to a one-time windfall from a year ago. Management sees revenue growth returning in the second half of the year as comparisons get easier, and with full-year revenue growth expected at 5%-10%, second-half revenue growth could top 20%.

With the shenanigans from Booking Holdings now fading in the rearview mirror, Trivago's growth should stabilize from here. Over the long term, Hefer expects it to continue to outgrow the broader online travel industry, which has been increasing sales by about 10% a year as Trivago builds brand recognition outside its home base in Europe. As a provider of hotel metasearch, the company is unique in the online travel space.

On the bottom line, Trivago has been operating around breakeven in recent quarters. If the company can take meaningful steps to profitability and deliver steady revenue growth, the stock should gradually recover.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Booking Holdings. The Motley Fool recommends Expedia and Trivago. The Motley Fool has a disclosure policy.