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Trivago (Buy, $15 PO) Stock view: Advertising continues to drive growth engine Trivago’s 4Q revenue and EBITDA results highlight the company’s rapid revenue growth and potential for solid profitability. Though there are concerns over the company’s large marketing spend (80-85% of revenue}, we think the Street will view Trivago’s results positively given continued revenue ramp while also achieving profitability. The stock remains highly volatile given the limited float. Commentary during 4Q’16 earnings from Trivago’s key customers Expedia and Priceline (as well as from TripAdvisor) indicated that paid traffic has been growing faster than free traffic, and that companies in the sector planned to ramp ad spend to drive continued traffic growth, which is a positive for Trivago. Trivago has best-in-class revenue growth, with 2017 revenue growth expected at 47% (vs. guidance of 45%+), led by 50% qualified referral growth. We also expect Trivago will become more efficient with advertising and start to reap the benefits of past brand advertising, with return on advertising spend (ROAS) improving across regions in 2017, a key driver of modestly improving EBITDA margin from 3.7% in 2016 to 3.9% in 2017. The company remains in growth mode, led by click revenue growth in ROW and Americas regions, as Trivago is driving brand awareness outside its key European foothold through aggressive brand marketing. The company is adding qualified referrals at an accelerating rate as it expands beyond its core Developed Europe markets and penetrates new markets. We think the company has significant runway for growth and can sustain 30%+ revenue growth through the end of the decade. As the business matures in its new Americas and ROW markets, we expect a better balance between profit and growth. We think EBITDA margins should accelerate as the company leverages ‘16 and ‘17 marketing spend, with greater uplift in ‘18. Key theme/metric(s) for 1Q: Qualified referral growth We forecast 56% qualified referral growth in 1Q (920bps deceleration on 730bps tougher y/y comp), led by 38% y/y growth in Developed Europe, 48% in Americas, and 110% in ROW. We expect continued robust marketing spend will drive user growth. Biggest 1Q issues/risks: e Weak return on advertising spend (ROAS} may be an earnings headwind. Competition in the company’s advertising channels may result in lower ROI trends. The company may also see less efficient advertising in newer, less mature markets. ¢ A positive update to 2017 guidance may be expected. Trivago currently expects total revenue growth of 45%+ and adjusted EBITDA margin is guided to flat to slightly up vs. 2016’s 3.7%. Estimates vs. Consensus: Expect revenue in-line vs. the Street, EBITDA ahead For 1Q, we expect revenue/EBITDA of €241mn/(€12mn) vs. the Street at €241mn/(€10mn). We expect 2017 and 2018 revenue and EBITDA to come above the Street and expect there is room for upside to management’s 2017 revenue growth and EBITDA margin guidance. Table 26: Trivago Estimate Summary 1Q17 2017 2017 2018 2019 Revenue BofAML est. €24 €281 €1,105 €1,498 €1,984 Growth Y/Y% 52% 57% 47% 36% 32% Street €24 €270 €1,088 €1,497 €2,035 BofAML est. vs. Street Below Above Above Above Below EBITDA BofAML est. €12 €6 €44 €127 €262 Street €10 €6 €40 €98 €197 BofAML est. vs. Street Above Below Above Above Above EPS Bankof America <> Merrill Lynch Internet/e-Commerce | 06 April2017 39 HOUSE_OVERSIGHT_014925