One possible way for investors to play 2021's expected surge in travel, dining and hospitality spend: Going long Internet companies whose services help local businesses promote themselves to past, existing and potential customers.
The bull case for such companies -- think names such as Groupon (GRPN) and Yelp (YELP) -- goes beyond the strong likelihood that (as COVID vaccines become widely available) consumer spending on so many of the activities that have become either riskier or impossible to do thanks to COVID will surge as 2021 progresses.
First, there's the fact that local businesses that have seen their sales plunge this year will often be hungry to win back consumers who were customers before COVID hit. This could take the form of using online platforms to deliver targeted promotions to these former customers, or simply using advertising to remind the former customers that they're still around.
Second, as companies such as Facebook (FB) , Shopify (SHOP) and Square (SQ) can attest, COVID has driven many local businesses to either use various digital platforms for the first time to sell their offerings and/or promote themselves, or more aggressively use them to do such things. And odds are good that many of these local businesses won't be going back to the old way of doing things.
Third, Groupon and Yelp have much more efficient cost structures than they did 12 months ago.
Yelp's GAAP costs and expenses were down 17% annually in Q3. That allowed the company to post a modest operating profit in spite of a 16% revenue drop caused by lower ad sales to local businesses, and positions it well to grow its bottom line as business improves next year.
Groupon, which is under new management and winding down its money-losing Goods (direct e-commerce) business, saw its GAAP operating expenses drop 36% annually in Q3. As a result, the company posted just a $16.2 million operating loss in spite of a 39% revenue drop. And though 2021 analyst estimates for Groupon's core local deals business are pretty conservative, the company is still forecast to be profitable next year.
Last but not least, while Yelp and Groupon's shares have bounced considerably from their post-COVID lows, they're each still down 18% on the year. As a result, their valuations are fairly moderate.
Yelp carries an enterprise value (EV - market cap minus net cash) equal to just 1.8 times its 2019 sales. And Groupon has an EV equal to just 0.8 times its 2019 local deals revenue.
Of the two, Groupon might be the better deal (pardon the pun). In addition to having a lower EV/sales multiple, the company faces somewhat less competitive pressure from Facebook and Google (GOOGL) , and it's perhaps better-positioned to see its profits inflect higher as local business activity rebounds.
Ultimately though, both companies could see their sales trend a lot better in 2021 than what markets currently expect, particularly during the back half of the year.
Also, though their ad businesses also cover a lot of other stuff, it's worth noting that Facebook and Google also have a fair amount of exposure to local business ad spend, not to mention (particularly in Google's case) travel ad spend. They're not pure-plays in this field by any means, but should see their travel and hospitality ad sales improve considerably next year.
