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Is Travelzoo’s (NASDAQ:TZOO) PE Ratio A Signal To Sell For Investors?

Audra Newberry

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to learn about the link between company’s fundamentals and stock market performance.

Travelzoo (NASDAQ:TZOO) trades with a trailing P/E of 52x, which is higher than the industry average of 30x. While TZOO might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.

Check out our latest analysis for Travelzoo

Breaking down the Price-Earnings ratio

NasdaqGS:TZOO PE PEG Gauge August 24th 18

P/E is often used for relative valuation since earnings power is a chief driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.

P/E Calculation for TZOO

Price-Earnings Ratio = Price per share ÷ Earnings per share

TZOO Price-Earnings Ratio = $12.8 ÷ $0.246 = 52x

On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to TZOO, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since TZOO’s P/E of 52x is higher than its industry peers (30x), it means that investors are paying more than they should for each dollar of TZOO’s earnings. This multiple is a median of profitable companies of 25 Internet companies in US including CathayOnline, InsPro Technologies and Advanced Technologies Group. Therefore, according to this analysis, TZOO is an over-priced stock.

Assumptions to watch out for

Before you jump to the conclusion that TZOO should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to TZOO, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with TZOO, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing TZOO to are fairly valued by the market. If this is violated, TZOO’s P/E may be lower than its peers as they are actually overvalued by investors.

What this means for you:

Since you may have already conducted your due diligence on TZOO, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for TZOO’s future growth? Take a look at our free research report of analyst consensus for TZOO’s outlook.
  2. Past Track Record: Has TZOO been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of TZOO’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.