June 2021 marked the two-year anniversary of the IPO of Trainline (LSE:TRN), which listed in London with a £1.7 billion market cap in 2019. Early investors have had quite a journey. After just over six months of more-or-less consistent post-IPO price growth, the stock tanked from 547p in February 2020 to a low of 225p just one month later. It then grew back to IPO levels before slowly fading out again, only to bounce back again in December 2020. In May 2021 Trainline shares tanked once again, falling from a 52-week high of 536p down to 271p.
At the time of writing the stock is trading at 293p, which is a 28% discount on the IPO price and 55% down on its 52-week high. At first it might seem to defy logic that a stock predicated on booking train journeys should be trading at its ‘peak pandemic’ levels just as the UK is poised to lift all Covid-19 restrictions, with 85% of the adult population vaccinated. Commuters are returning to offices, meetings are starting to take place, and the UK is likely to experience a staycation boom that will also create a new boom in summer rail travel.
The trouble is those pesky politicians. In May the UK Government announced a major overhaul of the rail sector, with a new body called ‘Great British Railways’ being created to consolidate the fragmented network of rail operating companies and to set fares. In an apparent snub for Trainline, which provides website services for 8 of the 20 disparate train operating companies, a consolidated Great British Railways will also create its own platform to sell tickets. This is what caused the Trainline price to slump just at the moment that it should have been climbing back to all-time highs as the UK returns back to normal.
But is the UK Government such a threat to Trainline? National Rail Enquiries has existed for a number of years as a clunky and counterintuitive website and app that is ultimately mostly owned by the UK Government, and has never challenged the dominance of Trainline. And the UK Government is hardly adept at creating efficient and intuitive digital services or for that matter overseeing any large-scale technology projects. Great British Railways might even turn to Trainline for a white-label platform, given its tried-and-tested technology.
Investors in Trainline shares should still sleep soundly in their beds by remembering that Trainline is a technology play: its website is already entrenched in the minds and its app already installed on the smartphones of millions of UK users who rarely migrate to alternative platforms without a big incentive. The original USP of Trainline may have once been to bring order to a fragmented market of 20+ train operating companies, but it has long since transgressed beyond this to become the endemic platform for booking train travel.
In June 2021 Trainline announced that it has increased net ticket sales to £334m, a 324% increase on the same period last year amidst lockdowns, though still lower than the £481m of net ticket sales that Trainline accrued during the same pre-pandemic period in 2019. By the end of May 2021, its run rate of ticket sales was actually greater than they were pre-pandemic in the same period during 2019 despite ongoing travel restrictions, suggesting that the company has actually increased and entrenched its market share – and should recoup the rewards as restrictions are lifted and rail travel returns to post-pandemic levels.
Trainline’s international business also shows signs of becoming a major future growth catalyst. It sells tickets and operates ticketing websites for train operators in 45 countries, which offers a further hedge against competition from Great British Railways in the UK, though the net margin on international sales is very small compared to UK sales.
Because Trainline is loss making and priced like a tech company, it has become one of the most shorted stocks on the UK market. It is expected to post a final loss in 2021 before turning a modest profit in 2023, whilst its balance sheet remains strained by a very high level of debt to equity. Before the share price plummeted in May 2021, the company was trading at 46 times analyst consensus of forecast earnings for 2022. At its new lower price of 239p, Trainline is trading at 25 times forecast 2022 earnings. I have a strong feeling that at the end of all of this, Trainline will still be standing strong. As short sellers realise this, I expect to see gains of 124% as Trainline shares reach a 52-week high of 536p by Christmas.
