Don’t hitch a ride with newly-listed Trainline
Train and bus ticket seller Trainline (TRN) is the latest ‘app’ or ‘platform’ business to see its shares soar upon making its stock market debut. Investors appear to be treating Trainline as if it is the latest in a long line of modern, disruptive companies. This could be a mistake.
It isn’t a new business in the same fashion as other stock market darlings like Beyond Meat and Slack. In fact, Trainline was founded in 1997 and began selling tickets online in 1999. It has essentially been doing the same thing for the past 20 years, albeit on a greater scale and adding a few extra services like alerts which tell customers when cheap advance tickets become available for specific journeys.
Four years ago it was valued at around £500m and was about to float on the stock market before private equity group KKR bought the company. A year later Trainline bought Captain Train to expand its position in Europe. The UK bit of the group makes a positive contribution to group earnings but the overseas interests are losing money.
Trainline’s equity is now valued at £2bn. It made a £13.7m pre-tax loss in the year to 28 February 2019 on sales of £209.5m. Although losses are narrowing and sales are growing, investors are placing a lot of faith in significant public transport demand growth which seems ambitious.
Admittedly Trainline has benefited from growing adoption of mobile and tablet devices, and consumers becoming savvy at booking their travel needs online. However, price is very important in the battle for consumer spend and Trainline doesn’t score that well versus its peers. The company is more expensive than train operators’ own websites when you factor in booking fees.
Trainline is the market leader in the UK for selling transport tickets which explains why a lot of investors have been eager to own the shares. We spoke to a fund manager who took part in the IPO (initial public offering) and they said demand was huge for the stock because everyone wanted a slice of a market-leading digital platform.
But what if new competition threatened to steal large chunks of its market share? Trainline says in its prospectus that National Rail Enquiries, a journey planning and information service owned and operated by the UK rail carriers, could capture a material share of the market should it decide to start selling rail tickets directly. It also flags the risk of Google, Apple, Amazon or Facebook being a major competitive threat should they decide to enter the market, given the strength of their brands and customer reach.
We also note Uber now includes London public transport bus and tube times on its app, perhaps with a goal of becoming a one-stop-shop for transport needs. That’s another headache for Trainline.
And finally, investors often buy shares in platform businesses as they can benefit from a network effect. For example, the more people selling items on auction platform Ebay, the greater the choice for buyers and the more appealing it becomes to use the service. With Trainline, it already offers widespread choice and greater customer numbers won’t make its services more appealing from a network perspective.
While Trainline offers a decent service, the price is wrong from an investment perspective given the weak barriers to entry.
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